ATC120523: Report Section 100 (1) (B) of the Constitution, 1996, Intervention by the National Executive in the Limpopo Province in the Provincial Departments of Treasury, Education, Health, Public Works, & Roads And Transport, dated 23 May 2012

NCOP Finance

REPORT OF THE SELECT COMMITTEE ON FINANCE ON THE SECTION 100 (1) (B) OF THE CONSTITUTION, 1996, INTERVENTION BY THE NATIONAL EXECUTIVE IN THE LIMPOPO PROVINCE IN THE PROVINCIAL DEPARTMENTS OF TREASURY, EDUCATION, HEALTH, PUBLIC WORKS, AND ROADS AND TRANSPORT, DATED 23 MAY 2012

 

1. Background

1.1. Reasons for the intervention

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

The key issues that were identified as problematic in the province were broadly described as underspending , overspending and challenges with supply chain management.

1.2. The Process of the Intervention

 

Section 100 (1) (b) of the Constitution, 1996, provides for the national executive to assume responsibility for the relevant obligation in that province to the extent necessary to:

 

a) Maintain essential national standards or meet established minimum standards for the rendering of a service;

b) Maintain economic unity;

c) Maintain national security; or

d) Prevent that province from taking unreasonable action that is prejudicial to the interests of another province or to the country as a whole.

The above factors stated in sub-section 100 (1) (b) of the Constitution, 1996, provide some guidance to the national executive intervention team on how it should intervene in each of the mentioned provincial departments. It highlights the need for intervention in a province for the purpose of upholding national standards for rendering services, the maintenance of national security, economic unity and preventing any possible action by such province that is prejudicial to the interest of another province or “the country as a whole”.

Sub-section 100 (3) of the Constitution, 1996, refers to national legislation that “may regulate the process” established by section 100. It should be noted that such national legislation currently does not exist.

A framework that provides a shared understanding and collective agreement on roles and functions of the national executive intervention team and the provincial administration does not exist at the time of this intervention. This issue was touched on in the introductory address of the Premier of the province to the delegation from the National Council of Provinces ( NCOP).

The Premier stated that the province was cooperating with the intervention despite the challenges that they are experiencing, and reported on remarkable progress to resolve the challenges that were identified.

In the following sub-section of this report, we sketch the structure of the national executive intervention effort.

1.3. The structure of the national executive intervention effort

The national executive intervention is lead by a political leadership that guides the work of an administrative team. The political leadership consists of a M onitoring Committee under the chairmanship of National Treasury and comprising the national executive authorities of the Departments of Higher Education and Training, Basic Education, Transport, Health, Public Works, Justice, and Public Service and Administration.  This Monitoring Committee will be empowered to co-opt any other ministry as it deems appropriate.

The actual intervention is operationalised by the National Executive Intervention Administrative Team that has been appointed by the Monitoring Committee. It consists of an Administrator that deals with challenges in the Limpopo Provincial Treasury, and in the Limpopo Departments of Education, Transport and Roads, Health, and Public Works. The National Executive Intervention Administrative Task Team regularly reports to the Monitoring Committee who in turn, reports to cabinet and the relevant cabinet committees.

1.4. Parliamentary Oversight over the national executive intervention in a province

 

In cases where the national executive decides to intervene in a province and assume responsibility for the relevant obligation in that province the NCOP is identified as the house that must exercise oversight over the intervention. Sub-sections 100 (2) (b) and (2) (c) of the Constitution, 1996, respectively give the NCOP 180 days within which to take a decision to approve or disapprove the national executive’s decision to intervene in a province. It further provides for the NCOP to regularly review the intervention for as long as it lasts and in the process make any appropriate recommendations to the national executive.

 

Pursuant to rule 101 of the Rules of the NCOP, the notice of the intervention was referred to the Select Committee on Finance for consideration and report.

 

In terms of rule 105 of the NCOP Rules, the Select Committee for Finance have to consult with the relevant Select Committees namely: the Select Committee on Education, Select Committee on Health and Social Services and the Select Committee on Public Services.

 

It is within this context that a delegation consisting of Members of the NCOP that serve in the Select Committees of Finance, Appropriations, Social Services, and Public Services undertook an oversight visit to the Limpopo province from 25 - 30 March 2012.

 

The objective of the visit was to gather information that would assist it in making a decision about the intervention as stated in sub-section 100 (2) (b) of the Constitution, 1996.

 

2. The approach of the NCOP delegation

 

The NCOP delegation followed a process of collecting information about challenges experienced from each of the Limpopo Departments of Health, Education, Treasury, Roads and Transport and Public Works. Each Head of Department ( HoD ) and their senior staff provided information to the NCOP delegation regarding the structure, management and control systems and relevant processes in their department. Thereafter , the respective administrators per department (that formed part of the National Executive Intervention Administration task team) gave presentations about their on-going work to deal with challenges that gave rise to the intervention. The NCOP delegation then deliberated with both the provincial team and the administrators on the information that they received.

 

Further to this, the NCOP delegation ensured that the Office of the Auditor-General gave its view of the audit outcomes and reasons thereof of the respective departments. An overview of all departments was provided followed by specific departmental information on the audit outcomes and reasons thereof.

 

To further enhance its assessment of the provincial situation, where time permitted it, the NCOP delegation divided itself into teams that conducted visits to sites, specifically related to Health and Education. The delegation undertook that in future follow-up visits, delivery sites related to Roads and Transport and Public Works would be visited.

 

It was believed that the above-mentioned approach would help facilitate the decision-making that the NCOP team had to make regarding the executive intervention.

 

Note that this report focuses on the presentations by the administrative heads of each provincial department as well as the information provided by the National Executive Intervention task team. The information presented to the NCOP delegation forms the basis on which to either approve or disapprove the national intervention as guided by sub-section 100 (2) (b) of the Constitution, 1996,

 

3. Presentations

 

3.1. Presentation by the Limpopo Provincial Director-General

 

The Director-General (DG) stated that the Limpopo provincial administration accept the national executive intervention and reported that it was yielding results. She further reported that Provincial Treasury was proactive as they had taken measures to ensure that sound financial management practices are embedded in the provincial administration so that the reach of limited resources could be extended. These measures included:

· Rebuilding/strengthening the treasury function to ensure that it could meet the obligations entrusted upon it by the Constitution and the Public Finance Management Act;

· The establishment of credible budget preparation process that seeks to ensure optimal resource allocation;

· Adherence to supply chain management (SCM) regulations. This includes steps to revoke circulars and guidelines that are contradicting existing SCM regulations; and

· Enabling the provincial treasury through the provincial Accountant-General to provide support to finance components of all provincial departments.

She further reported that the province was experiencing challenges including the following:

· Major challenges related to compliance to the Public Finance Management Act, 1999 (PFMA), e.g. contracts of offices which have expired and are not being renewed;

· Compliance to the payment within 30 days of receiving receipts from service providers;

· The issue of day-to-day running of the organization, e.g. cluster meetings, the HoD forum, Portfolio Committees, Select Committee on Public Accounts (SCOPA) meetings and addressing its recommendations (as a result of the intervention there is role confusion in terms of who is responsible for such daily activities of Departments); and

· Involving the line management in day to day operations from the level of the HoD so that the capacity that is being build by the intervention team could be sustained beyond the intervention.

 

3.1.1 Presentation by the Limpopo Provincial Treasury

 

The provincial treasury dealt with its attempt to implement a recovery strategy that covered key strategic areas namely:

 

a) Cash management

 

The province had an overdraft of R 757.262 million with the Corporation for Public Deposits (CPD). It had a cash shortfall of R 1.3 billion to meet its commitments. Cash management measures were put in place since December 2011 to reduce the overdraft and the mentioned cash shortfall. At the time of the intervention (12 December 2011) the provincial bank account had a positive balance of approximately R 667 million. By 31 January 2012, the cash balance improved to an amount of R1.4 billion and the province was expecting to meet its commitments fully until the end of the financial year.

 

As part of its cash management measures, payments from the Basic Accounting System (BAS) to service providers were reduced from twice per week to twice per month. Legitimate claims were paid within 30 days in line with the PFMA and Treasury Regulations. Persal supplementary claims were paid once per month and there were no changes to salary payments.

 

Due to these measures the provincial cash position further improved since January 2012 and at 29 February 2012, the account was R 1.617 billion.

 

The provincial treasury projected that the Provincial Revenue Fund may have approximately R 767 million cash in surplus by 31 March 2012. Based on this, it (the provincial treasury) recommended that this projected cash surplus be used to redeem the unauthorized expenditure with funding of R 749 million, which would improve the status of unauthorized expenditure.

 

b) Budget and expenditure management

 

The provincial budget process did not adequately address the issues of unauthorized expenditure and the bank overdraft. The province budgeted for a surplus of R 3.4 billion over the next three years to address its accruals and accumulated unauthorized expenditure. This surplus included funding that had been set aside to address inefficiencies particularly in the departments of Education and Health. This surplus was achieved without cutting back on spending in education, health, social development and other key pro-poor functions.

 

c) Overall provincial expenditure

 

The 2011/12 provincial expenditure showed improvement and the province was unlikely to overspend on its budget. Under-expenditure was projected at R 375 million after the provincial department of Social Development revised its in-year monitoring for February 2012. Such under-expenditure would result in additional cash in the bank at the end of the 2011/12 financial year.

 

However, due to control measures put in place to mitigate over-expenditure and to reduce or eliminate the bank overdraft, the social sector would overspend its budget by R 164 million, whilst the non-social sector departments would under spend their budget by R 539 million.

 

The province had instituted austerity measures by issuing Provincial Treasury Instruction Note No. 01 of 2012. Amongst others, the following cost-cutting measures had to be implemented to curb the spending:

· Freeze all unfunded posts;

· Filling of funded vacant positions are to be advertised only after prior approval by the Provincial HR Task Team;

· The structure of a department when costed must not exceed the Compensation of Employees budget over the Medium Term Expenditure Framework (MTEF);

· Conversion of leave pay into cash payments had to be stopped with immediate effect;

· Business class travel limited to MEC only;

· All public officials must use Class B vehicles;

· Kilometre controls must be implemented on travelling (1750 kilometres per month per official) excluding subsidized vehicles;

· Catering not exceeding R 50.00 per person may be provided only for meetings with external stakeholders. This provision would apply to meetings that takes longer than 5 hours; and

· All departments must re-evaluate costs for all cell phones, 3G internet devices and office phones with the aim of reducing monthly limits.

The challenge was that spending on conditional grants was at 76.1 per cent, and this low rate of spending on conditional grants was of concern as unspent funds would revert back to National Treasury unless provincial departments could substantiate why funds should not be surrendered.

 

d) Supply chain management (SCM)

 

SCM compliance assessment and monitoring revealed that departments and public entities were experiencing critical challenges in the following areas:

· High vacancy rate in SCM units;

· SCM Practitioners Skills gaps;

· Non compliance with procurement plan;

· Inadequate Contract Management;

· Inappropriate use and management of the supplier database;

· Non compliance with SCM prescripts; and

· No commitment to Strategic Sourcing.

The current procurement system was open to abuse, and the province continues to pay exorbitant prices for the acquisition of goods and services, whilst non commitment to procurement plans and SCM prescripts resulted in the province experiencing unauthorised and irregular expenditure. In its SCM turn around planning session, the National Task Team and the Provincial Treasury had identified four critical focal areas which needed serious attention:

· SCM practitioners skills gaps,

· Non compliance with procurement plan,

· Inadequate contract management, and

· Non commitment to strategic sourcing to leverage economies of scales.

e) Infrastructure management

 

The Human Resource (HR) capacitation framework had commenced and the province had a draft delivery Management System . The provincial departments of Education, Health, Roads and Transport, and the Provincial Treasury were finalising organisational structures for the infrastructure units. Division of Revenue (DORA) funding was available to fill posts in Health and Educations while National Treasury would make provision for the availability of funds for Provincial Treasury. The Project Management Units (PMU) in Education and Roads and Transport had been suspended.

 

f) A strategy to deal with the bank overdraft

 

Due to the historical context of the bank overdraft the major challenge was that the budgets for 2008/09, 2009/10 and 2010/11 respectively did not make provision to fully fund the compensation of employees in the Department of Education. This resulted in substantial unauthorised expenditure of R 449.4 million; R 705.2 million; and R 652.1 million and thus leading to the departmental and Provincial Treasury accounts to go into overdraft. Historically the budget did not make any provision for a surplus to mitigate any deficit that was incurred in a financial year. The Limpopo Treasury reported that the provincial department of education had unauthorised expenditure of R 2.2 billion and a bank overdraft of R 1.2 billion at the end of 2010/11 financial year.

 

The provincial treasury further reported that the province had developed a bank overdraft strategy to deal with the challenges of the unauthorised expenditure and the bank overdraft. This strategy was important for effective management of the bank overdraft in the province, including its planning, budgeting, implementation, reporting, monitoring and evaluation, with an ultimate objective of attaining a cash surplus for the province. The strategy to deal with the bank overdraft consists of three critical components. The first component consisted of six pillars namely:

· Leadership;

· Austerity Measures;

· Economies of scale measure;

· Standardization of prices;

· Budgetary processes and costing models; and

· Increase in own revenue.

It was mentioned that the second component of the strategy was Policy Measurement whilst the third was Monitoring and Evaluation. While the presentation did not unpack all aspects of the three-component strategy to deal with the bank overdraft in depth, members of the NCOP delegation robustly engaged the Treasury Team and the National Executive Intervention Administration task team on all three components.

 

3.1.2 The National Executive Intervention Administrator task team

 

The leader of the National Executive Intervention Administrator task team reported that the provincial revenue fund was overdrawn to the amount of R 2 billion at an interest rate of 10 per cent. This meant that no matter how well structured the Provincial Treasury’s three-component strategy was the amount owed could not be reconciled. The challenge was that it would take the better part of three years to be resolved while further debt would continue to be added.

 

The leader of the National Executive Intervention Administrator task team explained that the national intervention in the Limpopo Provincial Administration would take place in three phases:

• The set-up phase, which started during December 2011;
• The diagnostic phase, which took place from January to February 2012
  • The identification of root causes which at the time of the presentation still had to be finalised;
  • Forensic investigations to collect reliable data that are needed to make informed decisions and work out implementable strategies;
  • A proper diagnostic of revenue collection; and
• The recovery phase.

 

The task team leader further explained that the Provincial Legislature and the Provincial Department of Education had depleted their funding allocation for salaries by February to mid-March 2012. The financial management system of the Limpopo Provincial Treasury was in such disarray that it allowed the Department of Health to procure goods amounting over R 1 billion without following proper channels of supply chain management. The finance of the province is worsened by the Department of Education being in a financial quandary as it was projected to overspend by an amount of R 1.7 billion.

 

The Provincial Treasury failed to perform its transversal functions of regulation and oversight on the following: governance; oversight over the Public Finance Management Act (PFMA); tabling the Annual Financial Statements of the Provincial Revenue Fund; and ineffective and poor support rendered to departments and municipalities.

 

Further to that, the failure to implement an adequate system of cash management led to payments being made within short periods of time without proper controls in place to ensure that the financial resources did not get depleted. Departments and public entities relied on the Provincial Treasury to give support and guidance. When these departments, municipalities and entities over or under spent, it was evident that the weakness existed with the core function of the Treasury as described in the PFMA.

 

This failure certainly impacted negatively on service delivery. The Internal Audit and Risk Management functions were found to be ineffective with no commitment to implement resolutions taken to bring the financial situation back under control according to proper financial management principles.

 

The National Executive Intervention task team leader dealt with the recovery strategy that was developed in collaboration with the Provincial Treasury.

 

The strategy aims to do the following:

• Verify headcounts per department to establish the personnel baseline for budget purposes;
• Re-establish the basic operational practices in accordance with the existing legal framework;
• Update policies and procedural requirements of the affected provincial departments;
• Strengthen budget planning, expenditure management, cash management and supply chain management practices at the departments;
• Strengthen Provincial Treasury’s oversight, monitoring and reporting mechanisms by ensuring compliance to financial legislation and regulations;
• Strengthen the leadership and management capacity of the Provincial Treasury.

 

In summary, the presentations from the Limpopo Provincial Treasury and the National Executive Intervention task team to the NCOP delegation’s assessment of the situation in the Limpopo treasury was that there was a lot of evidence of capacity gaps related to financial management, financial control, supply chain management and sustainable monitoring and reporting. The team leader of the National Executive Intervention task team finally stated that these capacity gaps were also evident within the five departments and Limpopo Provincial Treasury that is the subject of the intervention.

 

3.2 The Limpopo Provincial Department of Health

 

3.2.1. Presentation by the Limpopo Department of Health

 

The department reported that they had 40 hospitals, 443 clinics (with 504 health facilities), and 21 gateway clinics. The department further reported that due to financial constraints it had halted the employment of doctors. Over-reliance on outsourcing was raised as a costly exercise for the department and contributed to some of the financial challenges.

 

a) Cash Management

 

The budget for the Department was reduced by R 489 million in the 2011 MTEF, a further R 264 million in the preliminary allocation and for the current financial year, a further R 302 million (includes unauthorized expenditure of R 65 million). Despite this reduction, compensation of employees has been provided at a growth of 5 per cent ICS, 1.5 per cent pay progression. Some of the implications of the 2012/13 budget deficit challenges for the department include:

 

• Reduced operational budget will impact on travelling (ambulances, mobile clinics, government vehicles and own transport), critical meetings or training, security services, National Health Laboratory Service ( NHLS), and medical supplies;
• Priority programmes such as Tuberculosis (TB), health promotion, poverty alleviation not fully funded;
• Reduction of the Emergency Services (EMS) budget to have negative impact on the response times. This also impacts on the coverage of services to the rural areas;
• Information technology systems will not be fully functional resulting in poor record keeping, long queues in hospitals, unreliable data, poor communication and ineffective billing of services.

 

The department had since developed an audit action plan to address the exceptions raised by the Auditor-General (AG) in the 2010/11 focusing on the root causes to avoid repetition of the same issues in the next financial year. During the 2010/11 financial year, the AG gave the department a disclaimer, with qualification issues on:

 

· Movable tangible capital assets;

· Capital work in progress;

· Receivables;

· Departmental revenue;

· Provision for doubtful debts patient fees;

· Commitments;

· Accruals;

· Irregular expenditure; and

· Fruitless and wasteful expenditure.

 

b) Litigations against the department

 

A total number of 309 legal cases instituted against the department. The cases range from medical negligence by health professionals, motor vehicle accidents by staff members, and defamation of character as a result of statements made by an official while on duty. The department instituted its own claims against companies , members of the public , and its officials for failure to perform other duties or pay what is due to the department.

 

c) Human resources

 

Due to some of the implications of the 2012/13 budget shortfalls, n o provision can be made for new appointments. It was mentioned that this will have a negative impact on service delivery, as there were no provision for performance bonuses, no funds for the replacement of equipment except under conditional grants, and preventative maintenance will not be fully done.

 

d) Infrastructure

 

The business case for 14 hospitals under the Hospital Revitalization Grant (HRG) amounting to R 31 million has been deferred to 2013/14. In addition, the new planned HRG projects involving 3 clinics and 20 hospitals worth R 90.4 million are also deferred to 2013/14 financial year. Except for water supply and sanitation in 30 clinics, all new Health Infrastructure funded projects worth R 252 million would be deferred to the 2013/14 and 2014/15 financial years. Information technology systems will not be fully functional resulting in poor record keeping, long queues in hospitals, unreliable data, poor communication and ineffective billing of services

 

 

 

 

 

 

 

3.2.2 Presentation by the Administrator of the National Executive Intervention Administrator task team

 

The following were key observations made by the administrator for health in the province:

• Management of cash was a problem;
• Payments were not prioritized according to essential services;
• Submissions of the In-Year Monitoring (IYM) reports were not a true reflection (Treasury wanted Departments to fit into the available budget and not reflect possible over-expenditure);
• Mis -allocation of expenditure items;
• Lack of policies and Standard Operating Procedures in supply chain processes;
• Material irregular expenditure has been identified during the verification process in the form of deviation from SCM regulations based on an “Annual Exemption circular”;
• Compliance with regulations for processing payments is lacking, mainly on supporting documents;
• Insufficient capacity also influenced by the fact that there are critical vacant unfunded posts. This makes financial management discipline a huge challenge;
• Several positions of Chief Executive Officers ( CEOs ) of hospitals are unfunded with personnel acting in these positions. The department’s staff establishment appears to be bloated;
• The compensation bill was inadequately funded at the start of 2011/12 financial year. This is in breach of the PFMA and means unauthorised expenditure is taking place; and
• There appears to be weak management at the medical supply depot which has a direct impact on the functionality of hospitals which is at the coalface of service delivery.

 

3.2.3 Recommendations made by the National Executive Intervention Administrator task team

 

Having noted the challenges existing within the department, the following measures are being implemented under the guidance of National Executive Intervention Administrator task team.

 

• A headcount to sort the expenditure on the compensation of employees with a PERSAL clean up as a quick win (project started in January);

· Review of the organisational structure is critical;

• The overall revamping of the SCM processes and introducing of Standard Operating Procedures;
• Strict adherence to the performance management procedures for accountability is critical;
• A r eview of the current decentralised model of financial management and the introduction of a project-based learning programme for financial and non-financial managers;
• Building capacity at district and provincial levels and work with the DPSA on retention that will incentivise attraction of critical skills, especially beefing up the Chief Financial Officer’s office. Funding should be availed to employ suitable staff in critical positions;
• Disciplinary steps to be taken against those found to have done wrong in the past; and

· A review of the current delegations for the recruitment of staff.

 

3.3 Presentation by the Limpopo Department of Education

 

a) Progress to deal with debt challenges

 

The Department reported that its 2012/13 budget was collaboratively drafted with National Treasury. An additional R 650 million was allocated to the Department to ensure that finances were available for the compensation of employees.

 

With regards to supply chain management, the Department stated that its internal control systems, relevant policies and procedure manuals were reviewed. Expenditure management was under review with all submitted invoices being scrutinised before effecting payment. The findings from this review exercise will assist Department to further improve its internal controls.

 

The Department reported that receivables were a reason why its financial statements received a qualified opinion by the Auditor-General (AG). The department stated that it did not have capacity to deal with long outstanding debts. The department referred to the assistance that it continues to receive from office of the Acting-Accountant General and the National Executive Intervention Administrator task team with the provincial treasury. Through this collaborative effort, a debt management strategy and action plan to address the AG’s findings was drafted.

 

An audit steering committee, comprising of the AG, the department’s internal audit committee, Provincial Treasury and the Department, meets weekly to assess progress with the implementation of the action plan. With reference to audit opinions over the years, the department reported progress from a disclaimer in 2009/10 to a qualified audit opinion for the current year. The qualification highlighted issues, related to assets, receivables and leave entitlement.

 

b) Challenges

 

The Department reported the following challenges:

 

• Shifting of the funds to ensure the compensation of employees had resulted in underfunding or no funding for Departmental policy priorities;
• Critical underfunding in the Learner Teacher Support Material (LTSM) . R 249 million provided for 2012/13 as compared to R 254 million in 2011/12. This amount was sufficient for the procurement of stationary only;
• The National Executive Intervention Administration task team is considering efficiency in LTSM procurement;

· Efficiency savings that were identified would be used to fund any shortages;

• Norms and Standards provided for 62 per cent of ordinary public schools and 60 per cent of independent schools;
• Compensation of Employees budget only for “warm bodies” over the MTEF period. No vacancies were to be filled. Only critical attrition posts would be filled. The Department will not be able to address critical manpower shortages at Districts, Circuit offices and Admin support to schools;
• Slow process of checking invoices, might result in accruals which the Department will not be able to deal with due to the constrained 2012/13 budget; and
• A delay in paying of service providers has resulted in threat to the Department’s ability to meet its priorities and also threatens expenditure on conditional grants.

 

3.3.1 Presentation by the Administrator of the National Executive Intervention Administrator task team

 

The administrator reported that the Department was faced with many challenges:

• Senior management positions, did not provide the necessary leadership to their subordinates;
• In spite of a cell phone and land line usage policy, there was no control at all and these facilities were abused;
• Disciplinary cases was a slow process and there did not seem to be a sense of purpose nor urgency required to deal with disciplinary cases;
• With regards to the Basic Accounting System ( BAS) versus PERSAL, the administrator found that in addition to BAS being used to pay for goods and certain services, staff allowances were also captured on BAS rather than on PERSAL;
• With regards to procurement thresholds, all delegations would have to be withdrawn before the new financial year and re-assigned with proper accountability put in place;
• Aims and objectives of the internal control system were very weak and almost non-functional. This indicated that financial control management and oversight had almost collapsed. Senior management staff had to urgently put this in place; and
• The lack of a functioning administrative system and a lack of basic record keeping meant that invoices presented by service providers could not be traced.

 

3.3.2 Recommendations by the Administrator of the National Executive Intervention Administrator task team

 

The Administrator proposed the following recommendations:

• Structural adjustment of the department was absolutely necessary, and posts would have to be re-advertised at senior level;
• Certain key staff would have to be released of their duties and exit packages may have to be negotiated;
• Supply Chain Management had to be centralised and electronically controlled by National Treasury; in addition, deviations had to be dealt with in terms of variances encountered;
• The Bid and Adjudication Committee of the Limpopo Department of Education had to be dismantled and a new Committee that included outside expertise had to be established; and
• The district and circuit needed to be restructured and appropriate staff should be appointed to manage these key service delivery nodes of the provincial department of basic education.

 

3.4 The Limpopo Department of Public Works (LDPW)

 

The Department reported that it experienced the following challenges:

• Lease management , especially commercial and residential rental collection;
• Asset Management , in particular the registration of assets, maintenance of asset register, and development of asset management plans;
• Provision and maintenance of Information and Communication Technology infrastructure and systems;
• Construction Management , with specific reference to infrastructure planning and project management;
• Human Resource Management , what could literally be referred to as ‘Recruitment, Retain ( ment ) , Retirement’ Planning;
• Risk Management , with 10 per cent of assessments and development of plans but less implementation; and
• Supply Chain Management , in particular the procurement of infrastructure projects.

 

a) Lease Management

 

The department developed a rental policy that limits the departmental leases to a maximum of 12 months. The department was currently engaging the Limpopo departments of Cooperative Governance, Human Settlements and Traditional Affairs to consider providing housing for indigent tenants that could not afford their rental obligations and no longer qualify for state housing.

 

b) Asset Management

 

The departmental organogram is under review. As part of this, the immovable and movable asset registers were moved to the chief directorate of Supply Chain Management. The chief directorate for property and facilities would only deal with the identification and registration of assets. All employees involved in the asset management processes were being trained for this purpose. The Auditor-General was requested to perform a preliminary audit of the Asset Register to assist with the identification of weaknesses.

 

c) Information and Communication Technology

 

The chief directorate, Government Information Technology Officer (GITO) was re-established in the organisational structure. The department would ensure that it was appropriately staffed and sufficiently resourced. An Executive Council decision was taken that only the Provincial Treasury can procure information.

 

d) Construction Management

 

The department addressed the critical issue of vacancies by appointing a General Manager for Construction Management after almost two years of the position being vacated. Positions of project managers were filled with appropriately skilled staff being deployed to district offices so that they are positioned closer to the projects that required management. A communication protocol was developed to deal with essential services to client departments.

 

e) Risk Management

 

The department conducts a strategic risk assessment during the third and fourth quarter of every financial year. Thereafter, operational risk assessments for both the core and support functions are done and risk mitigation plans are generated. The department was currently using a manual reporting system. The Department developed a Fraud and Corruption Prevention Strategy and Plan that is aligned to the National Anti-Corruption Strategy.

 

f) Financial Losses

 

The department reported that it operates with a journal of R 39, 095 million. This was processed to clear the unauthorised expenditure balance, as was set aside for the 2011/12 financial year. The balance on unauthorised expenditure was cleared on the trial balance. The department recorded R 461 000 of fruitless and wasteful expenditure by the end of March 2011; this consists mainly of interests charged on late payment of electricity and municipal services. The potential irregular expenditure for 2011/12 was for security services whose contracts expired March 2010. The contracts were changed to extend the security services to a month-to-month basis after two adverts expired due to incapacity in the supply chain management chief directorate. By the end of November 2011 the amount for irregular expenditure has grown to R 13 295 735.16 .

 

3.4.1 Presentation by the National Executive Administration Intervention task team

 

a) Human Resources and Organisational Design

 

The administrator informed members of the Committees that the team was busy with the following processes in the Department of Public Works:

 

· Completed a review of appointments to determine whether they are in line with the Public Service Act and relevant regulations;

· Completed a review of the department’s organizational structure to determine whether it is in line with stated strategic objectives, PERSAL and the functionality thereof;

· Reviewed Occupation Specific Dispensation (OSD) translations to determine compliance with OSD policy of the public service (this project was just initiated);

· Reviewed the application of performance management policy and the system for the Senior Management Service (SMS);

· Completed a ssessment of the submission rate of financial disclosure by the SMS staff; and

· Completed a r eview of the leave management in the department to determine whether leave has been appropriately utilized by staff and recorded by management and administration.

 

b) The turn-around phase

 

The National Executive Intervention task team reported that the number of unfunded posts remained high. The task team advised that these posts had to be removed. Unfortunately the organogram was not available for the initial investigation into these unfunded posts and at the time of reporting to the NCOP delegation this aspect could not be fully interrogated. A further challenge is that the department’s asset register reflected RDP houses as part of the property of the department. This required further investigation as part of the turn-around phase.

 

c) Property and Facilities Management

 

A contract to enhance the immovable asset register commenced on 01 August 2006. Valued at R 14.9 million, it had to be completed in 18 months but was put on hold due to discrepancies in data integrity. The department still does not have an immovable asset register that contains all the properties under the custodianship of LDPW. The Basic Account System (BAS) report indicates that the total paid for this contract to date was R 58.4 million. The total variance paid to the contractor was however R 43.5 million more. The first payment of almost R 500 000 was reported to have been made 3 months before the commencement of the contract and the last payment was made on 31 March 2009, a year and 2 months after the expiry date of the contract period. This required further investigation.

 

With regard to the vesting of provincial state land, a complete list of land that needs to be vested in the name of the Provincial Government of Limpopo does not exist. The LDPW currently has no disposal policy in place to dispose of various categories of redundant properties. However, records show that to date residential properties have been disposed of on recommendation of the Member of the Executive Council (MEC) for approval by Provincial Executive Committee. Due to a lack of accounting standards and the absence of a disposal policy the process had to be stopped. The manners in which mandates, User Asset Management Plans (U- AMPs ) and Custodial Asset Management Plans (C- AMPs ) are being compiled and processed indicated non-compliance with the Government Immovable Asset Management Act, 2007 (GIAMA).

 

The department has 102 running leases with a monthly expenditure in excess of R 15 million (taking into account escalations effected at different times during the course of the financial year). Out of 102 leases, 71 are signed and 31 are without valid contracts - although some are running on a month-to-month basis pending supply chain processes to renew them. Further to that, the leasing portfolio rental rates per square meter presented a situation that the current rentals are above the market related rentals. These are not aligned to the industry benchmark tool like the Rhode Report which is used for building grade categories.

 

The National Executive Intervention task team administrator further reported that contract documentation was incomplete, not filed correctly and therefore very difficult to trace within the LDPW. The department has no database of expenditures to reconcile against the leasing budget since client departments manage their own payments directly with the landlords.

 

With regards to state leases, the LDPW is struggling to recover debt. Rental due to it is in arrears for more than 120 days and a debtors management policy is not in place. The age analysis was not updated accurately and was not aligned to the debtors register. It was evident that rental amounts charged were not market related, and in most cases there were no lease agreements. There was no customer billing system in place and account statements were done manually.

 

d) Finance and Supply Chain Management

 

Total expenditure for the period ended 31 February 2012 is R 723 million which is equivalent to 86 per cent of the budget allocation of R 839 million. Expenditure is in line with the expenditure guideline. No over spending is projected at the end of the financial year. In comparison to the month ended January 2012 expenditure has increased by R 62.4 million. On average for the period between April 2011 and November an amount of approximately R 63 million was spent monthly and between December 2011 and February 2012 expenditure decreased to an average of R 54 million.

 

Compensation of employees for the 29 February 2012 was R 523 million, and expenditure is equivalent to 91 per cent of the total allocated budget. Compensation of employees equals 69 per cent (R 575 million) of the total allocated budget of (R 837 million) for the department. Based on the expenditure for the end of February 2012 no over spending is projected for the end of the current financial year.

 

Under spending of approximately R 6 million for Property Rates and Taxes, and approximately R 18 million for capital assets is projected for the end of the current financial year.

 

The department was currently paying security services (36 security contracts costing R 1.8 million a month) irregularly with contracts that expired in 2010. In some cases officials awarded services to one supplier without the approval of the Accounting Officer or the delegated official. In total, expenditure amounting to R 5.4 million was classified as irregular expenditure.

 

During payment verification processes the National Executive Administration Intervention task team discovered two suppliers who were irregularly awarded tenders and the matter was reported to CFO for further investigation. It was further noticed that the selection of service providers from the system of quotations was done manually, which leaves the system open for abuse, and creates fertile ground for corruption.

e) Infrastructure and Project Management

 

For the financial year 2011/12, LDPW was managing a total budget of R 1, 073 467 087.88 with 57, 6 per cent being allocated to the Department of Health and 17, 9 per cent for the Department of Education. In 2009, LDPW abandoned the project management spreadsheets in lieu of receiving the PMIS/ iEWORKS system as a replacement system for interoperable management of assets by government departments. To date the system has not been handed over to the department let alone the construction management unit for testing, accepting and implementation.

 

There are generally contradictory conditions of contracts on the projects and the said conditions of contract are not correctly applied or adhered to. The department does not advertise for the appointment of professional service providers - uses a rotational appointment system from their service provider data base regardless of the value of the project. The consultants’ letters of appointment are generally incomplete and unclear when it comes to the following:

· the actual projects that they are appointed for;

· the specific professional services that they are appointed to do; and

· the specific professional tariffs of fees that will apply i.e. actual discipline and applicable date of tariff of fees.

 

A deficit can be envisaged in the MTEF baseline compared to the project pipeline of the building programme till 2013/14 financial year and will continue to create a financial/cash crisis if not addressed.

 

Another challenge identified relates to the cross-functional roles of the Custodian Department (LDPW) and its client departments. Even where the appointment of contractors had been undertaken through open tender, client departments (the Department of Education in particular) tended to disregard contracts entered into by LDPW and appoint own contractors.

 

3.5 The Limpopo Department of Roads and Transport

 

The HOD reported on achievements that included four (4) new bridges that were under construction and set to be completed in due course. The upgrading of the R33 from the N11 to Modimolle Vaal Water was almost 50 per cent complete. The construction on the main taxi rank had commenced, and 13 of the 15 drop-off points and shelters were completed. The project is 20 per cent complete and 115 jobs were created to date.

 

Programme 3 (Transport Operations) had a set target of establishment of freight hubs in Polokwane , Musina and Lephalale . A bid was advertised in December 2011 for the appointment of a service provider to do feasibility studies on the development of freight logistic hubs in Polokwane , Musina , Burgersfort and Lephalale .

 

With regard to the target Implementation of Integrated public transport networks in Sekhukhune , t ransport service designs have been completed and consultations were done with relevant stakeholders and the Greater Tubatse Transport Forum. An amount of R 164 million was required to run a fully integrated two way peak hour subsidised service with buses and taxis. This service would cover 43 817 kilometers per day . Another critical target under programme 3 was the development of the Polokwane International Airport . The procurement process on widening of Taxiway shoulders has been completed and the service provider will be appointed in the 4th quarter. Construction of phase 1 of the new air traffic control tower had already commenced.

 

Under programme 4 (Transport Regulation), the department had a set target of Expanding the computerised learners license system to 5 additional municipalities. In terms of progress made to date, 10 more Driving License Testing Centers have been equipped with Computerised Learners License System to make a total of 15 centers in an effort to fight against corruption in driving license environment.

 

a ) Cash flow Management issues

 

The expenditure report on different programmes as at 31 December 2011 reflected 74 per cent spending on Administration, 70 per cent on Transport Infrastructure, 72 per cent on Transport Operations and 69 per cent on community based. The spending patterns at 28 March 2012 reflected a 100 per cent actual spending of the allocated conditional grant towards construction, 100 per cent towards public transport, 94 per cent towards EPWP and 63 per cent of the conditional grant on infrastructure. The reasons for the under-spending on infrastructure projects were cited as ranging from country-wide shortage of bitumen, late payment of service providers and severe rainfall that led to flooding in certain parts which were earmarked for infrastructure development.

 

b) Supply Chain Management

 

The following were highlighted as key priorities of the department under SCM:

 

· Improving capacity in Demand and Contract Management;

· Continuous training of all Bid Committee members;

· Conducting workshops to empower potential bidders or service providers;

· Revamping the supplier database to align with the new BBBEE regulations (BEE rating certificate); and

· Commitment to continue to enforce the segregation of duties and responsibilities in Bid committees.

 

3.5.1 Presentation by the National Executive Administration Intervention task team

 

The Administrator pointed out the key issues that led to the placing of the department under administration which were:

 

• A qualified audit opinion by the Auditor-General’s Office for 2010/11;
• No contract management system in place;
• Internal control weaknesses;
• Lack of oversight over the Road Agency Limpopo (RAL) and Gateway Airport Authority Limited ( GAAL);
• Allegations of tender irregularities; and
• Suspect contracts and invoices.

 

The National Executive Administration Intervention task team reported that it had received the full cooperation from the provincial department in doing its intervention work. Considerable improvements had been made since the intervention took place. With regard to cash management, the cash situation had stabilised and as such the department was able to pay all the service providers (with legitimate invoices/certificates). As a result no projections of over-expenditure were expected.

 

From December 2011 to date, a total 1652 payments (transactions) to the amount of R 614.778 million were authenticated and paid to service providers. Suspicious invoices and contracts were referred to the forensic investigators for further processing. In general, the task team reported a poor working relationship between the department and its entities (RAL and GAAL). Except for the poor working relations between the Board and the CEO of RAL, there were allegations of disregard of the PFMA, co-operate governance and Board directives by the CEO, including allegations of irregular award of tenders. The situation within GAAL had led to the suspension of the CEO and subsequent dissolving of the entire Board. A llegations of gross maladministration were made related to the seriously understaffed SCM unit; one staff member function as the entire SCM unit. There was no clear segregation of functions, payment were made using hand written cheques for casual labourers and there were no supporting documents when service providers were paid.

 

4. Findings

 

As stated in the introductory section 2 above, the NCOP delegation collected information from the Director-General of the province, the five HoDs and the various administrators of the National Executive Administration Intervention task team as well as the provincial Office of the AG. This information forms the basis on which to either approve or disapprove the national intervention as guided by sub-section 100 (2) (b) of the Constitution, 1996.

 

Having been informed in this way, as well as gathering responses, comments and participating in discussions with key role-players during the oversight visit, the NCOP delegation asserts that the following was evident:

 

4.1 Provincial Treasury

 

· The province had an overdraft of R 757.262 billion;

· A cash shortfall of R 1.3 billion was required to meet its commitments;

· The provincial revenue fund was overdrawn by R 2 billion at an interest rate of 10 per cent;

· The Provincial Legislature and Provincial Department of Education depleted their funding allocation for salaries by February to mid-March 2012;

· The financial management system of the Provincial Treasury was in disarray;

· The Department of Health procured goods amounting to R 1 billion without following the correct SCM channels ;

· The Depart of Education projected to overspend by R 1.7 billion;

· Failure to implement an adequate system of cash management and proper controls;

· Non-compliance with regard to the PFMA by the provincial departments;

· The cash management system was weak;

· Capacity gaps related to financial management, financial control, SCM and sustainable monitoring and reporting; and

· National legislation referred to in section 100 (3) of the Constitution, 1996, to regulate the process of national interventions is needed.

 

4.2 Provincial Department of Health

 

· Management of cash was a problem;

· Payments were not prioritised;

· Misallocation of expenditure items;

· Lack of policies and standard operating procedures in SCM;

· Material irregular expenditure;

· Supporting documents to comply with regulations for processing payments are lacking ;

· Critical vacant unfunded posts made financial management a huge challenge;

· The compensation bill was inadequately funded for 2011/2012 financial year resulting in unauthorised expenditure;

· Weak management at the medical supply depot impacted on the functionality of hospitals; and

· Non-compliance with the PFMA.

 

 

 

4.3 Provincial Department of Education

 

· A lack of internal controls and monitoring;

· A lack of capacity to deal with long outstanding debts;

· Senior management did not provide the necessary leadership to subordinates;

· Processing disciplinary cases was delayed;

· A lack of proper accountability with regard to procurement;

· Financial control management and oversight almost collapsed - Internal control systems are weak,(non functioning administrative systems and basic record keeping); and

· There was a lack of a functional administrative system - basic record keeping was very weak.

 

 

 

 

 

4.4 Provincial Department of Public Works

 

1. Weak management referring to:

· Leave management;

· Asset management;

· Construction management;

· Human resources management;

· Risk management; and

· SCM.

 

1. At 30 November 2011 the amount for irregular expenditure grew to R 13.295 735.16;
2. The departments asset register showed RDP house as part of the property of the department - this required further investigation;
3. The number of unfunded posts remained high and had to be removed;
4. A contract to enhance the immovable asset register valued at R 14.9 million was eventually put on hold. The basic account system indicated that the amount paid for this contract to date was R 58,4 million; and
5. A complete list of what needs to be vested in the name of the provincial government of Limpopo does not exist.

 

4.5 Provincial Department of Roads and Transport

 

· Non-compliance of GIAMA ;

· A debtor’s management policy was not in place;

· Internal control weaknesses;

· Lack of oversight over the RAL and GAAL ;

· Allegations of tender irregularities; and

· Suspect contracts and invoices.

 

4.6 Overall

 

· The five administrators of the National Executive Intervention task team identified the challenges to be addressed through their diagnostic analyses;

· Action plans to address the challenges were drawn up by the different task teams, but still need to be approved by the ministerial task team;

· There was not enough skilled people to implement the action plans;

· The work relationship between the administrator in the Department of Education and the MEC and HoD will have to improve;

· The MEC’s and HoD’s of the mentioned provincial departments acknowledge that the diagnostic analyses showed the shortcomings that need to be corrected in the departments;

· The issues identified by the provincial AG as potential risks in early 2011 in the management of the departments were not fully addressed. Little or no effort was made to deal with the issues; and

· In August 2011 the MEC for the Provincial Treasury requested the AG to provide support on financial management to provincial departments.

 

5. Recommendations

 

T he Select Committee on Finance was guided by section 100, subsection (1) (b) of the Constitution, 1996, that at its core protects the interest of the people. Section 100 (1) (b) of the Constitution, 1996, states that the assuming responsibility for the relevant obligation in that province to the extent necessary to:

a) Maintain essential national standards or meet established minimum standards for the rendering of a service;

b) Maintain economic unity;

c) Maintain national security; or

d) Prevent that province from taking unreasonable action that is prejudicial to the interests of another province or to the country as a whole.

 

The Select Committee on Finance therefore recommends that:

· The NCOP approves the intervention in terms of section 100 (1) (b) of the Constitution, 1996, in the five provincial departments to ensure good governance and sound financial management as required by the PFMA;

· The NCOP, in terms of section 100 (2) (c) of the Constitution, 1996, while the intervention continues, review the intervention regularly and make any appropriate recommendations to the national executive;

· In line with sub-section 100 (3) of the Constitution, 1996, which refers to national legislation that may regulate the national intervention process in provinces, the Minister of Cooperative Governance and Traditional Affairs should consider introducing national legislation to regulate the process of national interventions in provinces; and

· The Minister of Finance should submit the action plans based on the diagnostic analyses by the five administrative task teams in the NCOP as a matter of urgency.

 

 

 

Report to be considered