Tshwane University of Technology (TUT) governance matters: follow-up

Meeting report

The Chairperson welcomed everyone present, and expressed the hope that the Tshwane University of Technology (TUT) would provide detailed responses on the information that was sought by the Committee. The Committee would be dealing with matters that could not be finalised in the last engagement.

Independent Assessor's findings on TUTEH

Mr Rob Theunissen, Independent Assessor (IA), commenced with the method that he had proposed to the university to conduct the independent assessment on Tshwane University of Technology Enterprise Holdings (TUTEH).

The major issues highlighted in his report were:

• There appeared to be no logical basis for TUTEH to be housed in a separate legal entity instead of being operated as a division within the university;
• Third stream income should be managed and directed by persons with appropriate commercial skills, qualifications and experience, instead of being managed and directed predominantly by persons with academic experience;
• Third stream income-generating activities -- whether or not within a separate company -- should be appropriately governed, which was not in place at TUTEH;
• Additional and innovative income streams were not being generated by TUTEH, and no meaningful analysis had been performed of what additional revenue streams were anticipated;
• Taxation considerations of third stream income should be properly considered, for the benefit of the university;
• Employment practices at TUTEH were a major concern, where it had been observed that persons were appointed and remunerated without apparent justification for their appointment and salaries;
• Stakeholders were largely disenchanted with TUTEH and how it was being operated;
• Conflicts of interest were not being managed optimally; and
• Coordination between the university and TUTEH and their inter-relationship was problematic 

Briefing by TUT

Mr Tilson Manyoni, Chairperson of Council at TUT, said that he was surprised that Mr Theunissen had been invited to the platform, and that the integrity of the process was very important. Members of the institution had freely and willingly participated in the process of investigation.

The Council had appointed the independent assessor last year, and at a council meeting in November, each member of council had received the report to go through it during December. Members of Council had been given enough time to go through the report and apply their minds to it fully so that they could deliberate on it thoroughly.

TUTEH had also been given an opportunity to go through the report, and there were certain matters that had been referred to TUTEH

On 29 January, Council had convened a special meeting and considered the report of the IA and the response from the Board of Directors of TUTEH. After consideration of the IA report and its recommendations, as well as the response from the TUTEH Board, Council had resolved to retain TUTEH as a separate entity, in line with the sectoral benchmarks.

The Council had then requested the Governance and Membership Committee (GMC) to attend to the following, and to submit its recommendations to Council:

To reconstitute the Board of Directors to comprise of seven members (four non-executive directors and three external members of Council), to be chaired by an independent non-executive director;
To review the business model of the entity and to restrict it to two subsidiaries -- Tshwane Institute for Continuing Education (TICE) and TUTEH Properties -- with specified performance targets and timeframes;
To compile a performance contract with the reconstituted Board, which should include the timeframes for the repayment of the loan to the University;
To review the governance instruments regulating the relationship between the TUT and TUTEH, which included the relationship agreement between TUT and TUTEH and the Memorandum of Incorporation, the delegation of authority to the shareholder representative, and development of a policy on sureties and guarantees via the finance committee of Council.

TUTEH's response to Independent Assessor’s report

Mr Nick Motsatse, Chief Executive Officer (CEO),TUTEH, presented the entity’s response to the Independent Assessor’s report.

He highlighted shortcomings in the IA’s report, in that it:

Completely overlooked the relationship agreement – a critical constitutive document;
Failed to consider relevant and material evidence;
Provided superficial treatment of taxation as a fundamental reason for reintegration;
Overlooked TUTEH’s stage of development/maturity curve; and
Gave a non-technical and shallow analysis of TUTEH’s business model.

The report was not based on factual findings, but largely on untested hearsay. There were weak links between the process/methodology-findings-recommendations. The assessor bemoaned the lack of access to documents, but did not ask for board meeting packs and personnel files. The report could therefore not be relied on.

Furthermore, the IA failed to undertake any meaningful benchmarking. Most universities had registered privately-held limited liability companies ((Pty) Ltd). Assertion to the contrary in the report was simply not true. TTOs were no exceptions but the norm, and were part of the TSI mix of universities.

TUT infrastructure projects/recovery programme: status report

Dr Nkgatho Tlale, Deputy Vice Chancellor: Operations, TUT, presented the status of the infrastructure projects of the University. The presentation covered the details of all the delayed projects, including all variation orders, an analysis of the initial project costs versus revised or varied costs per project, and the projected date of completion.

The recovery programme had commenced in 2018 and consisted of 11 projects across the seven campuses. Currently, three projects had been completed, six were under construction, and two were in procurement. Projects' under-recovery were either due to non-performing contractors, non-performing professional teams, internal poor project and/or contract management, and delayed starts of construction. Initial project funding was mostly from the Department's infrastructure and efficiency grant (IEG) funds, which had been funded in tranches between 2012 and 2017, and a few that were funded by TUT. For the recovery of the projects, funding was predominantly from the TUT Executive Management Committee fund, with the exception of three projects that were still funded by the IEG.

[See presentation for detailed breakdown of initial and revised costs]


Briefing on disciplinary cases

Prof Lourens van Staden, Vice Chancellor, TUT, told Members briefly about the arbitration process initiated by the University against Dr Ezekiel Moraka, DVC: Student Affairs and Extracurricular Development (SAED), which had been concluded on 23 March through the signing of a mutual separation agreement.

Discussion
The Chairperson commented that the responses received today had been comprehensive, and this gave the Committee a sense of what actions had been taken by the University Council to address the findings in the Independent Assessor’s report.

He was concerned about the variations that had been made to the projects. When professional teams had been appointed to design a project, provisions were made for unforeseen circumstances. This was a matter that the University may be requested to look into, as there was no certainty whether the variations involved work that actually needed to be done.

Dr W Boshoff (FF+) said that he listened closely to the idea of TUTEH being a separate entity from the University. It seemed that the scale made it imperative to work separately, but he was unconvinced with the information that had been presented. If one looked at different University campuses, there was a huge scale. He was concerned about TUTEH’s tax affairs, and said that some deductions must happen.

The whole idea of third stream income seemed to be something that universities did not do. Universities did supply accommodation, but it was done in another way in order to finance something else, and he was rather unsure about what it was. It seemed that the establishment of TUTEH was to generate income to do something else -- but what was that something else?

 Mr T Letsie (ANC) welcomed the reports of the IA, as well as the comprehensive responses from the University and TUTEH. He had read the assessor’s report twice, and asked about the terms of reference of his appointment. He had reason to believe that the assessor may have gone beyond the terms of reference, given the time that it took to come up with the report, which was only 80 days.

Secondly, the assessor had argued that there was no logical basis for TUTEH to operate outside the University. What did this mean, and had he compared it with other universities? Some universities had more than one third stream companies that were registered as Pty Ltd. For example, the University of Pretoria had four private companies.

The IA had also claimed that third stream income companies should be run by people with commercial or business skills, but then stated that TUTEH must be in-house. He was struggling to connect the dots on what the assessor was proposing, and asked him to elaborate on this.

The IA had also mentioned that there was a conflict of interest, and wanted to know which stakeholders were conflicted and how he had arrived at that conclusion.

Why was the IA saying the recruitment and remuneration of two members mentioned in the report must be investigated independently? Why should these two individuals be subjected to an investigation?

He was satisfied with the composition of the new board of TUTEH, and with the performance contract of the CEO and the board. He was in full support of these measures.

Was the issue of double-dipping raised by the assessor in his report true, and what plans were in place to attend to this?

It was normal practice in the post-school education and training (PSET) sector for universities to establish private companies to generate third stream income. Members were not against that practice, but they were for proper governance being put in place. He was happy that the Council had admitted and acknowledged that there were loopholes in the business model of TUTEH, and that it had made efforts to implement the recommendations of the assessor. How was the Council going to ensure that there was transparency so that all stakeholders trusted the process that had been put in place?

He suggested that the Committee should perhaps receive quarterly reports from the Council about the performance of TUTEH. He also asked for the list of TUTEH’s board members and their curricula vitae (CVs) so that Members could satisfy themselves that they were qualified and competent for the positions.

On the recovery of projects, there had been mention of recovering money from contractors, but what were the timelines and actions against the contractors who failed to execute the projects? When was the money going to be recovered, and was the University going to ban the directors of those contractors or the companies from doing business with the University again?

Ms J Mananiso (ANC) said that she was worried that there were only males in the leadership positions of the institution, but was pleased with the report that had been presented to the Committee and how detailed the responses were. 

She asked about the default in business, and sought clarity on the plan of the institution on this. She suggested that the University needed to provide timeframes for the strategic plans dealing with the issues that were outlined in the report. This would allow the Committee to track what had been committed.

There had to be an improvement in governance by engaging all stakeholders and keeping the stakeholders informed, and they had to be consulted. New ideas must also be allowed and welcomed from stakeholders by the Council. It would take every stakeholder’s involvement to build the University, with a particular focus on the community as a stakeholder. The University had to ensure that the locals had a stake in a percentage of the opportunities that came out of the institution.

Ms C King (DA) said that the presentation did not clearly state how much the University had invested into TUTEH to date. Considering the tax implications, she would have appreciated a presentation on this matter. Looking at the balance sheet of the TUT, the total equity in 2019 was R3.4 million, but the liabilities amounted to R12.871 million. This was concerning, and the liquidity of this institution should become a subject that needed further discussion. Was there any other third stream income that TUTEH was considering to venture into to enhance the liquidity of TUTEH as a going concern?

The non-current liabilities showed there were loans from shareholders amounting to R6.533 million. Who were these shareholders, and what was their level of input into TUTEH? If one considered the independent investigation, it was alarming that some of the directors of TUTEH were also members of the Council, and had been part of the previous council.

Ms N Mkhatshwa (ANC) concurred with the sentiments of the previous speakers on the detail that had been presented to the Committee. She sought clarity on TUTEH being an external or internal entity, particularly because other institutions might take an interest in setting up entities of this nature, but there had been reference to other institutions already doing this. Could Members receive an explanation on this?

Looking at the infrastructure projects that had been abandoned, this brought into to question whether there had been a conversation with the Department regarding strengthening the institution's capability to roll out infrastructural projects.

(Connectivity was lost, and further questions asked by Ms Mkhatshwa and Ms D Sibiya (ANC) were inaudible.)

Responses

Independent Assessor
 
Mr Theunissen replied that the Universities of Pretoria and Stellenbosch did have separate companies, but the third stream income activities were something of a hybrid. Where they operated separate companies, they would have certain students develop something, and the University would fund it, and if it became viable they gave the students a shareholding or profit incentive to operate that venture. The fact that universities were considering this was appropriate, but the other costs associated with a private company were enormous, like paying board attendance meetings, having an audit committee and spending money on audit fees, etc. Running a company was expensive in itself, and it depressed the third income stream activities.

Regarding the two gentlemen mentioned in the report, these were factual findings. They were either being paid salaries or given increases that were exorbitant – way above what was expected. The assessment had looked at all the employment contracts and salary schedules, and the flags had gone up with those two individuals. There were no remuneration red flags for other employees, which was why the point had been made that these two individuals should be independently investigated. There were consistencies with the other employees’ remuneration packages or payments.

TUT

Dr Tlale responded on the high number of variation orders, and said that in any construction project there were variation orders. Projects were often designed all the way through at 99%, and the 1% took into account the unforeseen circumstances. The reasons for the high variation orders were the community disruptions, and the long time it took to get the project to the construction phase and beyond. There used to be a big scope that was left, but it was not a lot of scope anymore. It was best practice to allow a 10% contingency on variation orders, which was something that was done for all the projects.

Most of the variation orders since he had commenced in the position six months ago had been approved and verified by three individuals. There was only one variation order that he was uncertain about, which would be looked into, but the rest of the variation orders were clear and thus approved.

On the banning of directors of contractors that had defaulted on projects, the companies had been blacklisted, and the University was now in the process of blacklisting the directors. The process of recovering the funds was still under way, and it was now a legal matter that he could not discuss in detail.

The TUT had the capacity to deliver capital projects by employing the services of external project management units.  With the new structure that was being developed, the university was trying to appoint a team of engineers internally, which would enhance its capacity on the projects. The adjudication template took cognisance of the fact that the contracts must factor in the black economic empowerment (BEE) status and people with disabilities, and most of the contracts had gone to black and women-owned companies.

The estimated costs to complete the projects, and the duration and times that were projected to complete the projects, were included in the presentation.

TUTEH

Mr Motsatse said that at the beginning of the process within Council, and the consideration of the third stream income, there were two processes that the steering committee of the business development unit had gone through at that stage. The first had been to look into what other institutions were doing in that area, as most institutions that were financially stable had third stream income entities that were devoted to driving third stream income. A study had been done by PricewaterhouseCoopers (PwC) around 2014, which showed that those entities ended up contributing about 26% of the discretionary budget of the university. It was a trend that was not invented by TUT – it was a norm in the sector.

The second consideration was looking at what would be suitable for TUT. Historically, TUTEH was not the TUT's first attempt at third stream income generation. The previous two attempts had been solely in-house, which did not succeed. It was then realised that a dedicated entity would be appropriate. Any entity or company had costs attached to it, but there were also trade-offs that one would have to deal with. The university environment was framed differently, and it worked within a different legislation framework – it was not a framework that was geared towards commercial activity. They therefore needed to set up an entity that worked within the legislative framework that was geared towards commercial activity.

Through TUTEH, the plan was to create a revenue mix that would be fit for purpose which, in this case, would be generating returns at about 25% of the discretionary funding for the University.

He said there was no such thing as double-dipping, but what had happened was that at the initial stage, as part of building, there had been a discussion between the CEO and the VC, and some of the executives within the University,  to allow some of the skills that TUTEH could utilise. The two individuals had been seconded, but the secondment had gone on for too long for various reasons, and was now being addressed.

The Registrar should be able to provide the CVs of the TUTEH board members to the Committee.

The TUT had invested about R27 million into TUTEH during 2018 and 2019. In 2020, there had been no further investment, because TUTEH could generate sufficient income. Since then, there had not been any further injection from the shareholder. That amount had been broken into two -- R20.9 million was for capital injection, and R6.5 million was for capital expenditure.

The detailed analysis of the TUT tax statement was ongoing with PwC and the University, and TUTEH had also engaged the services of other specialty firms for tax treatment. This would be part of the audit for this financial year, and it would be made available.

Regarding the liquidity of TUTEH, one would need a second revenue mix to achieve certain levels of liquidity. In the presentation, there was a ratio analysis slide where one could see that the liquidity ratios were going in the right direction. In 2019, the liquidity ratio was marginally above the benchmark of 2.1, and they were at 2.5. This ratio had come down from 6.5 in 2018.

TUTEH would make serious strides to address diversity in terms of the representativity of women. Currently 52% of the employees were women.

Dr Tlale said that all universities in the country were under financial pressure, and the first stream income was dwindling. The second stream income was the tuition fee income, and 90% of TUT's students came from the poorest of the poor households, so they had serious and substantial debt. Many students did not have the necessary money. The surplus funding went towards academic projects, and as a university of technology, the bulk of the students were working with state of the art equipment. The subsidy was not enough and the students were extremely poor. The Tut could not transplant what Wits, the University of Pretoria (UP) and Stellenbosch were doing -- they needed to come with their own unique model. They had started with an in-house project, but it had had shortcomings. All universities’ core business was teaching, learning, research and community engagement. The TUT was not in the business of accommodation, so it had established a separate entity to drive that.

Lastly, the TUT was active in five provinces, and one of the campuses in Soshanguve had about 22 000 students, which made it a university on its own. The township campuses had no accommodation for students, so special efforts were needed to provide accommodation for the students, because it was linked to their success at university. The model the TUT was using was linked to the financial growth strategy of the University, and there should be a deeper understanding of the establishment of the TUTEH project. The TUT was not here for surplus or profit, but to ensure quality, relevant and decolonised education for its students.

TUT Council

Mr Manyoni said that part of the terms of reference were the deliverables that were referred to on page seven. There had to be a report with a benchmarking exercise involving at least two public universities on governance, structure, finance, etc. This was a clear deliverable, which was part of the terms of reference. The Council was not trying to re-invent the wheel, but to imitate what other universities were doing. The incoming board had been instructed to do a detailed benchmarking exercise, and see how other institutions were operating.  

When the assessment was conducted, it was not a cheap exercise. The institution had paid the Independent Assessor close to R1 million for 80 days of work. They would have hoped that part of that assessment would have given a detailed benchmarking exercise.

The Council would be happy to provide the quarterly reports and the CVs of the incoming board. The Council was also willing to provide progress reports on the stakeholder management engagement process.

TUTEH was wholly-owned by the TUT, and it was important for the institution to see TUTEH grow. It was the biggest technology university in Africa, and its drive was to attract private partnerships to ensure that its students were able to get funding for their studies.

The Council was willing and open to work transparently with the Committee. With TUTEH, it hoped it could create the blueprint for other black universities to follow. There would be mistakes on the way, but they could only learn from those mistakes. The Council also welcomed the Theunissen Report openly, and was prepared to learn from its findings and recommendations.

Chairperson's comments

The Chairperson thanked everyone for participating, commenting that the University had done well to prepare for this meeting, and that Members were generally satisfied with the detail of the presentation. They had not been happy with the first engagement, because they felt that the University had not taken time to respond adequately to the issues that had been raised in the Independent Assessor’s report.

An independent verification audit must be done to check whether there had been value for money in the additional costs of the variation orders. Consequence management must start with the appointed engineers and designers. One could not accept cost overruns, so a detailed audit report was needed on the costs involved, and with everything that had happened, consequence management must be implemented on all the levels.

There was one infrastructure project project in Garankuwa which the Members had been told was going to be completed soon. An audit must be conducted on this project so that management and Council satisfied themselves about the implementation of consequence management, who the project managers involved were, and how much could be recovered from them. This must then be made public so that these people were known and banned from doing business with the public universities.

People did not understand the extent to which universities had embarked on leveraging third stream income. The Committee would request the Department to do some work to try and determine which universities had entities trying to leverage third stream income. Some institutions were doing it much better, and the Committee may also invite Universities South Africa (USAf) to provide input.

The increasing levels of student funding through the National Student Financial Aid Scheme (NSFAS), with a budget of R46 billion, and the money meant to fund the universities, was declining. There would come a point where the funding required for students was more than the first income stream for universities.
 
Consideration of minutes

The Committee's minutes of their meetings on 23 March, 11 May and 26 May 2021, were considered and adopted.

Consideration of Committee reports

Committee reports on the quarterly performance of the Department of Higher Education and Training and the Department of Science and Innovation were considered and adopted without any dissenting views.

The Committee Report on the oversight visit to NSFAS was also adopted without any amendments made.

The Chairperson indicated that this was the last meeting of the term, and thanked the Members for participating and engaging during the deliberations.

The meeting was adjourned.