ATC141111: Report of the Select Committee on Finance on termination of section 100 (1) (b)issued to the Limpopo Province and issuing of directives in terms of section 100 (1) (a) of the Constitution of the Republic of South Africa, 1996, dated 11 November 2014.

Report of the Select Committee on Finance on termination of section 100 (1) (b )issued to the Limpopo Province and issuing of directives in terms of section 100 (1) (a) of the Constitution of the Republic of South Africa, 1996 , dated 11 November 2014.

1. Background

1.1 Reasons for the intervention

On 5 December 2011 the South African cabinet announced its intervention in the Limpopo provincial government in accordance with section 100(1 )( b) of the Constitution of the Republic of South Africa, 1996 . This effectively placed five Limpopo provincial departments, namely Provincial Treasury, Education, Transport & Roads, Health, and Public Works under national executive administration.

The following were identified as the province’s major challenges: underspending, overspending and supply chain management.

1.2 Intervention Procedure

Section 100(1) (b) provides for the national executive to assume responsibility for the relevant obligation in a province to the extent necessary to:

i. maintain essential national standards or meet established minimum standards for the rendering of a service;

ii. maintain economic unity;

iii. maintain national security; or

iv. prevent that province from taking unreasonable action that is prejudicial to the interests of another province or to the country as a whole.

The national executive intervention team was guided by the above-mentioned constitutional provisions in how it undertook its task.

1.3 The transition from section 100 (1) (b) to section 100 (1) (a) of the Constitution of the Republic of South Africa, 1996

On 09 July 2014 Cabinet approved the transition of the intervention from section 100 (1) (b) to section 100 (1) (a ) of the Constitution of the Republic of South Africa, 1996 . This means that the MECs of the affected provincial departments will assume full executive powers to run the departments and the accounting officer role will revert back to HODs of the respective departments. The concurrence of the National Council of Province (NCOP) is being sought in terms of section 100 (1) (2) (c) of the Constitution.

Cabinet has also given clear conditions that the Provincial Executive will have to fulfil, as a pre-requisite for determining complete withdrawal. In this regard, the national executive authority will define the measures that the province will need to take to address identified areas of failure and will monitor the province’s progress. The province will also be supported to avoid relapse.

Cabinet mandated the Inter-Ministerial Committee to enter into a memorandum of understanding with the Premier and his executive. This is to give effect to section 100 (1) (a) to make provision for outstanding issues and to exercise oversight and provide support on implementation of the sustainability projects. Performance against the conditions set will form the basis for determining the time at which both the transition to section 100 (1) (a) is finalised as well as when the intervention is withdrawn altogether.

2. Progress report by the Administration Team

2.1 Provincial Treasury

The next section summarises progress achieved by the administration team in Limpopo province by the five departments in terms of the financial position of the Province and the service delivery achievements.

2.1.1 Financial position of Province

The financial position has improved and the Province had over R4 billion cash surplus in the bank compared to an overdraft of R1.7 billion in 2011. It had the lowest number of unpaid invoices (over 30 days) in the country ,amounting to R80 million, which was a decreasefrom R1.1billion at the start of the intervention. The accumulated unauthorised expenditure has been reduced from R2.7 billion in 2011 to R600 millionin 2014/15, the rest will paid out by the 2016/17 financial year. The departments were no longer over-spending on their budgets.

2.1.2 Achievements

The Compensation of Employees (COE) in the Province hasbeen stabilised. The Province was no longer over-spending on its budget ;the process of headcount verifications has been completed and the number of temporary educators has been reduced from 2544 to 6.

The Province has improved its compliance to the 30 day payment requirement over the past two years, from 78 per cent in 2012/13 to 86 per cent in June 2014. The process of verification of learners, and educators in the provincial departments of Health and Education has been completed.

In the provincial Department of Education, there have been improvements in per capita transfers in terms of the norms and standards, the amounts of which increased from 62 per cent to 90 per cent. The Learner Teacher Support Material (LTSM) textbooks procurement and delivery has resulted in greater coverage.

Medicine stock levels in the provincial Department of Health has been raised from 48 per cent to the current average of 78 per cent, while the value of expired medicine has been reduced from R11 million to R2.5 million. The medicines supply chain has also improved anddirect delivery to institutions was being piloted to avoid the unnecessary stock-piling of medicines at the depot. Furthermore, ad-hoc management of hospitals, which was identified as a challenge previously, has been addressed by appointing 37 hospital CEOs out of 40 vacancies. The Department has also installed boilers at 19 hospitals and 52 autoclaves.

Within the roads sector, the provincial Department of Roads and Transport has completed eight road construction projects.

2.1.3 Challenges

The following section presents the outstanding challenges which must be addressed during the transition phase:

• Resolving weaknesses in Supply Chain Management systems;

• The conclusion of disciplinary and criminal cases;

• Appointment of competent Senior Managers in key positions; and

• Addressing the skills gaps in financial management and infrastructure.

2.3 Department of Health

During the diagnostic phase, the National Department of Health took over the following functions:Financial Management and Budget Control; Procurement Management; Human Resource Management; Pharmaceutical supply Management; Infrastructure Management and Information Technology Management. The next section discusses progress achieved with respect to these areas.

2.3.1 Financial Management

The current CFO’s position was one of the high-profile disciplinary cases and was in the process of being resolved. The improved Standard Operating Procedures ( SoP’s ) has been approved to guide SCM practices and SCM decision-making has improved. The team has centralised the payment verification process at Districts and provincial level in order to address the weaknesses identified.Incidences of unauthorised expenditures has been reduced significantly.

2.3.2 High Compensation of Employees’ Expenditure

Statistics South Africa has assisted the Department with the head countverification process. The Persalclean-uphas reduced the number of approved and funded posts from 62 430 to 38 000. The Department of Public Service and Administration (DPSA) and National Department of Health were leading a process of designing a generic macro structure for the Health Sector.This was expected to enable the provincial Department of Health to realign its organisational structure accordingly.

2.3.3 Health Infrastructure

The Department has adopted a strategy to conduct conditions assessments ( mainly for Electro-Mechanical equipment and installations )in all its facilities . A total of 30 hospital assessments, out of 42 ,have been done. The remaining 12 assessments were expected to be finalised by the end of July 2014. The full magnitude cost of the project will be determined once all facilities have been concluded.

2.3.4 Pharmaceutical and surgical supplies

The procurement of pharmaceutical and surgical supplies remained stable at 86 per cent and 62 per cent availability, respectively, against a target of 95 per cent as compared to 48 per cent when section 100 processes began.

2.4 Department of Education

At the beginning of the intervention, the Department of Education was not able to fund key strategic educational priorities, resulting in failure to meet essential national standards. The system of financial, supply chain, contracts, asset, records and cash flow management and controls was not effective and efficient. The compensation of employees’ budget was found to be bloated.

2.4.1 Achievements

The following section presents some of the achievements of the intervention:

• The Department hasimplemented an innovative Learner Teacher Support Material (LTSM) procurement and delivery strategy;

• The budget (particularly for the CoE ) has been stabilised.There was no overspending at the end of the 2013/14 financial year and substantial savings were realised, mainly arising from austerity measures implemented;

• Funding of schools in terms of the National Norms and Standards has been improved from 62 per cent in 2012 to 90 per cent in 2014;

• The organisational structure has been realigned, but was being refined to meet the directives from the DPSA in relation to the education sector generic structure;

• PERSAL clean-up has been completed and unfunded posts were abolished;

• The head-count verification process has been completed by the Stats-SA and was in the process of being consolidated with theEducation Management Information System (EMIS) and PERSAL;

• The Department was left with only 6 out of 2 544 temporary educators to be placed permanently;

• The post baskets of ordinary public schools has been established and published; and

• An audit rectification project team has been appointed by the National Treasury and deployed to the Limpopo Departments of Education and Health.

2.4.2 Challenges

The following section presents the outstanding challenges which must be addressed during the transition phase:

· Skills profiles for specialised line functions,particularly in the CFO’s Branch;

· Ownership of sustainability projects, especially those that should address AG audit queries;

· Constant challenges arising from the procurement and delivery of CAPS-aligned textbooks, in spite of the structured LTSM procurement and delivery strategy;

· Irregular appointment of educators by schools as well as the unstructured changes of subject streams without following due processes and priori approvals by relevant authorities;

· Failure by schools to retrieve Curriculum Assessment Policy Statements (CAPS) aligned textbooks at the end of the school calendar year and reporting of textbook shortages timeously;

· The differences in salary scales paid to educators when compared with the other provinces;

· A new phenomenon (nationally) where educators resign or take severance packages from the department, and later re-enter the system at higher salary scales as per Public Service Co-ordinating Bargaining Council ( PSCBC) agreements;

· Schools enrolling higher learner numbers than the school‘s capacity in order to be classified differently, resulting in a higher salaries for principals, additional promotional posts, and additional educators required;

· Ineffective merging and closure of small schools which are not educationally and/or economically viable; and

· Contingent liability arising from litigations.

2.5 Department of Public Works

The Department of Public Works had to address the following: poor management of property portfolio; spiralling unauthorised expenditure; inadequate capacity in the public financial management and technical capacity; poor IT infrastructure planning and under budgeting.

2.5.1 Achievements

The following section presents some of the achievements of the intervention:

• The Department has completed thefinal lease review report and has made recommendations. This was in response to the Province paying close to R200 million in leases.

• The Province has since identified land to build a government precinct in order to reduce lease costs;

• A service provider has been appointed to rectifythe asset register;

• Vacant positions have been filled with appropriately qualified staff. All other departments in infrastructure delivery have access to the necessary technical capacity for project identification and planning of feasibility studies;

• The AG audit findings have been reduced from 8 to 2 during the 2012/13 financial year; and

• TheBAUD system for movable asset management has been implemented.

2.6 Department of Roads and Transport

The challenges in the Department of Transport, at the beginning of the intervention, included weak internal controls or inadequate SCM policies; no contract management, Auditor General audit opinions; poor financial management at Road Agency Limpopo (RAL) and Gateway Airports Authority Limited (GAAL) and lack of proper mechanisms for verification of payments.

2.6.1 Achievements

The following section presents some of the achievements of the intervention:

• The cash situation has been stabilised andthe Department has not over spent on the 2012/13 budget;

• All outstanding invoices have been paid, with 99 per centof which wasbeing paid within the required 30 days, and implementing cost containment measures;

• The internal controls with regard to payments in the Department have been introduced. From December 2011 to date a total of 23 912 invoices to the value of R5.2 million have been verified and processed for payment;

• The budget has been aligned to the Strategic Plan and the Annual Performance Plan and broken down to project level;

• Brought additional capacity from the Department of Transport (DOT) to do quality checks and invoice verification with regards to two main cost drivers, namely; roads infrastructure and bus contracts as well as;

• Additional capacity from DOT to improve financial management and Supply Chain Management (SCM) at both Road Agency Limpopo (RAL) and Gateway Airport Authority Limited (GAAL);

• An official from the Department has been seconded to act as an interim CEO for the duration of the intervention; and

• Contract management in the department has improved;

• The Public Protector’s recommendations have been implemented;

• Obtained unqualified Audit Report for 2012/13; and

• Cleared the payments backlog ,particularly at RAL.

2.6.2 Challenges

The following section presents the outstanding challenges which must be addressed during the transition phase:

· Outstanding disciplinary cases;

· Finalisation of the study on the appropriate models to deliver infrastructure and management of the airports in the province;

· Provision of support on criminal and related investigations;

· Provision of support to the numerous litigation cases; particularly at RAL;

· Support in the filling of key positions; and

· Support in the SCM practises for high value contracts.

2.7 Progress report by the Anti-Corruption Task Team

As at 15 August 2014, the provincial department of transport had a total number of 14 cases, 14 cases in the department of Health, 7 cases in the Education and 4 cases in Public Works.

There were 22 forensic investigation reports on disciplinary cases when the intervention started. DPSA was requested to facilitate the disciplinary hearings thereof. There were 47 cases of irregularities identified from the forensic reports issued by the National Treasury against state officials and 302 cases of conflict of interest established by the Special Investigative Unit (SIU).

When the DPSA commenced with management of disciplinary cases, only 99 cases were recorded for disciplinary processes. Other cases have been resolved and withdrawn. Additional cases from the Department of Roads and Transport (8), RAL (1), GAAL (10) and Public Works (1) increased the total number of cases to 108.

The key challenges on slow finalisation of disciplinary cases are continuous postponement of cases, failure of state witnesses to attend meetings and resignation of officials before the cases are concluded.The SIU has devised strategies to address the challenges identified.

During the investigations, the SIU discovered that, in relation to tenders awarded by the provincial departments, there were actual losses to the value of approximately R1.420.102 billion.

The table below reflects the departments in question, the amounts tendered for, and the losses incurred in relation to those tenders.

	Provincial Department	Tender Amounts	Actual Loss
1	Roads and Transport	R1.222.9 billion	R 409.7 million
2	Health	R1.421.264 billion	R268.83 million
3	Education	R1.587.7 billion	R445.572 million
4	Public Works	R207 million	R192 million

During the investigation, the SIU uncovered new cases which had not formed part of the Limpopo investigations :these tenders amounted to R948 million, and actual losses to the value of R104 million were discovered.

3. Committee observations

3.1 The intervention team has made progress in Limpopo ,particularly the improvement in the financial position of the Province;

3.2 There are challenges and concerns related to the sustainability of the intervention, which include vacancies, outstanding fraud and disciplinary cases, lack of integrated systems and lack of capacity;

3.3 The Committee has noted the decision of Cabinet to approve the transition of the intervention from section 100 (1) (b) to section 100 (1) (a) of the Constitution of the Republic of South Africa, 1996 ;

3.4 There is a need for provincial departments to improve on their audit outcomes ;

3.5 The National Treasury has appointed consultants funded by the European Union to conduct capacity and skills audit assessment of offices of Chief Financial Officersand that the process started in July 2014;

3.6The legacy projects in the Department of Education have a negative impact onthe Auditor General’s audit outcomes;

3.7 Statistics South Africa has been reluctant in releasing detailed database information for use in further analysis by the Province; and

3.8 The Department of Public Service Administration (DPSA) does not have a mechanism linking PERSAL systems between the public service and the municipalities.

4. Recommendations

After having considered the submissions by the National Intervention Team together with the Limpopo Leadership, the Committee recommends that:

4.1 The Limpopo Provincial Legislature should continuously monitor and exercise oversight over departments and municipalities throughout the transition phase;

4.2 The five provincial departments that were put under administration should sustain the mechanisms/systems that are in place during the transition period and over the long term period;

4.3 T he transition process from the Administrators team to the Provincial Officials should be clear and systematic for the purposes of accountability and continuity;

4.4 The Province should consider making use of the experts who no longer work for the Development Bank of Southern Africa following its restructuring, to fill the critical vacant positions;

4.5 The HOD of the Department of Education in particular, should put plans in place to address the legacy projects that are having a negative impact when it comes to audit outcomes from the Auditor General;

4.6 The NationalDepartment of Basic Education should address the issue of reinstating rural allowance providing the Limpopo Department of Education with funding;

4.7 Statistics South Africa should provide the Province with the required information as an amount of R18.5 million was provided to fund the project in the provincial Health and Education Departments;

4.8 The Department of Cooperative Governance should, within 90 days after the adoption of this report by the House, table progress report on the draft legislation that would provide regulations on interventions in terms of section 100 (3) of the Constitution;and

4.9 The National Council of Provinces should approve the transition of the intervention from section 100 (1) (b) to section 100 (1) (a) of the Constitution of the Republic of South Africa, 1996 .

Report to be considered.