DIRCO & African Renaissance Fund 2015/16 audit outcomes; Foreign exchange fluctuations on DIRCO budget: Treasury input

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International Relations

12 October 2016
Chairperson: Mr M Masango (ANC)
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Meeting Summary

Auditor General South Africa (AGSA) said the audit outcomes of the International Relations and Cooperation portfolio remained stagnant with no improvement over the last three years from 2013/14 to 2015/16. The lack of improvement had Department of International Relations and Cooperation (DIRCO) receiving a qualified audit opinion on its financial statements for the third consecutive year. However, the African Renaissance and International Cooperation Fund (ARF) remained unqualified with findings. On compliance with legislation, DIRCO did not adequately implement proper control systems to safeguard and maintain assets. It did not always follow competitive bidding processes and did not take effective and appropriate disciplinary steps against officials who permitted irregular, fruitless and wasteful expenditure and non-compliance with supply chain management prescripts were not investigated.

The ARF did not submit financial statements within two months after year end, which showed a lack in proper and timely record keeping.

The audit showed that the significant area where assurance is not provided is at senior management and accounting officer level. This level of assurance has remained stagnant over the past three years and shows that overall there is a lack of accountability and discipline by senior management in addressing audit findings.

AGSA met with the Minister in July 2016 to discuss the anticipated audit outcomes and the status of the implementation of the seven commitments made by the Minister the previous year. Four of those were in progress and three had not been implemented at all.

The National Treasury briefed the Committee on the process to alleviate the impact of foreign exchange fluctuations on the budget of the Department of International Relations and Cooperation and the African Renaissance Fund. The presentation covered the five operational areas that foreign exchange has an impact on; management of foreign exchange risks; and the African Renaissance International Cooperation Fund. The operational areas for foreign exchange exposure are the Foreign Services dispensation, the Locally Recruited Personnel staff establishment, operating payments: foreign office leases and municipal rates, the maintenance and refurbishment of the state-owned international property portfolio and transfers to foreign governments and international organisations. The depreciation of the rand is in response to developments in domestic and external environments. When the rand depreciates, DIRCO can buy less with the money than what was budgeted for. The impact of the fluctuations in the currency leads to a shortfall which is the difference between the rand denomination appropriation and the foreign currency denomination. The difference between what is budgeted for and the spot rate obtained, results in the budget shortfall.

Meeting report

Auditor General South Africa (AGSA) on DIRCO and  African Renaissance Fund audit outcomes
Mr Thamsamqa Zikode, Business Executive: AGSA, accompanied by Mr Nicholas Mokwena, Auditor: AGSA undertook the briefing.  He drew attention to page eight of the presentation which shows that the audit outcomes have remained stagnant over the last three years. The ARF has an unqualified audit with findings and DIRCO has a qualified audit opinion for three consecutive years.

On compliance with key legislation, it indicates that for the last three years there has been non compliance for both the ARF and DIRCO. On the quality of the Annual Performance Plan, AGSA did not pick up any concerns about the usefulness of the information and DIRCO therefore met all the SMART criteria. The quality of the submitted performance reports were sufficient and appropriate in terms of the reliability of the information provided to AGSA. On the status of key controls, DIRCO has remained fairly consistent for the last three years. The graph indicates that there are two areas where focus needs to be placed.

First area is that of leadership, which talks to effective leadership oversight responsibility, effective HR management, policies and procedures which talk to the implementation of the relevant framework, policies and systems of internal control. The second area talks to the financial and performance management such as proper record keeping, daily and monthly controls, accurate and complete financials and review and monitoring compliance. These are the daily disciplines that should be implemented to ensure that by the time the reporting period comes, all the information is readily available for reporting. The two discussed areas need emphasis for both the ARF and DIRCO.

In terms of the assurance providers, there are three levels. The first level is senior management, accounting officer/authority and executive authority. The second level is the internal audit unit and the audit committee and the third level is the portfolio committee. All these levels have different roles in making sure that the environment is risk free, has controls in place and has sufficient financial management in place which ensures that the reporting is credible. The audit showed that the significant area where assurance is not provided is at senior management and accounting officer level. This is based on the fact that over the last three years DIRCO has been reporting on the exact same thing. Thus, not picking up on any changes and the ministerial commitments do not result in any improvement in the outcomes. Regarding the executive authority and the Portfolio Committee, AGSA reports that there is some assurance being provided, however AGSA would like to see that level of assurance move up. DIRCO needs to be asked what they are going to do differently based on the three-year findings.

Unauthorized expenditure for the year was R167 million compared to R117 million of the previous year; however this was as a result of foreign exchange movement. Fruitless and wasteful expenditure was to the tune of R6 million. There was irregular expenditure of R339 million, due to non-compliance with supply chain management (SCM) processes and where services were procured without following relevant procedure. In terms of the investigation results of the above expenditure. DIRCO yet again did not undertake any investigation of the unauthorised, irregular or fruitless and wasteful expenditure as required by the PFMA and no consequence management occurred. There was a slight improvement in that ARF did deal with the incidents, however there was not full implementation of consequence management.

AGSA picked up material misstatements on the financial statements for both years and these were corrected, however DIRCO could not correct all of them which led to a qualification.

AGSA findings on compliance with key SCM legislation have been the same for the last three years.
There has been a slight improvement with contract management, where no contracts were extended without following proper procedure.

The material misstatements in the financial statements were on assets and the area of heritage assets.

The top three root causes shows that it is clear that AGSA has been reporting on the same things for the last three years.

The first root cause is the slow response by management, accounting officer and senior management. This means that AGSA has been singing the same response for the last three years and providing the same kind of information, same reports and having the same engagements with the department to say that these are the things that need to be improved. The response in this particular area has been very slow.

The second root cause is the instability or vacancies in key positions – specifically when you look at the assurance providers. One of those assurance providers which is key, is the internal audit.

The last root cause is that of lack of consequences for poor performance and transgressions. Certain non-compliance needs to be investigated. The investigation establishes whether these are occurring because people are not competent and if that is the case then DIRCO needs to provide them with the required training and development. The main reason is that you cannot take someone who does not have the required competencies to a disciplinary process because it is not a disciplinary matter, it is a competency issue and you need to deal with this. Then there is the issue where you have staff who know what needs to be done and no one understands what is preventing them from doing their daily duties. That is where consequence management in the form of disciplinary due process kicks in. AGSA met with the Minister to deal with these matters and sought some commitments. In that process the Minister needs to provide AGSA with commitments and exercise the required oversight in ensuring that these matters are not reported again going forward.

What AGSA has found is that in a number of situations you would find that there is an audit action plan. However, this action plan is geared towards dealing with a particular finding and it is not dealing with the root cause. You need to deal with the root cause which led to the finding and not the finding because when AGSA comes they select another sample and go to a different foreign mission.

Mr Zikode spoke about enhancing performance and consequence management. Especially, when the department has a qualified audit opinion, you need to look at an area where they have qualified and the people responsible for that area of qualification. There needs to be consequence management as well as some form of punitive sanction, perhaps not being awarded a bonus. That is to avoid a situation where the department has qualified for a number of years but the people responsible continue to be incentivised. The preparation of monthly financial statements and reconciliations includes disclosure notes. It been advocated that this be done all year round so that when year-end arrives it is not being done for the first time. What is being asked today is that the Committee assist AGSA to get concrete audit action plans from DIRCO to deal with these particular issues and to receive regular feedback from DIRCO on what progress they have made and that they are engaging the relevant stakeholders. On heritage assets, DIRCO cannot sort that out without regular engagements with ASGA and National Treasury to assist them.

The last issue that needs to be elevated is interaction with the audit committee so that the Committee can have an independent assessment of what is happening at DIRCO rather than having to wait until year end to hear from ASGA.

Discussion
Mr B Radebe (ANC) expressed his appreciation that the presentation gave certain tasks that Members were expected to do. For example the Committee had committed to meeting with AGSA twice a year and this was something that they could not do so before pointing the finger at others, the Committee needs to assess what it has not done and if it has contributed to what has been presented today.

Ms D Raphuti (ANC) said the Committee needs to applaud the positive things in the report. Such as the performance reporting where DIRCO has done exceptionally well. However, over the last three years AGSA has been complaining about the assets. What has AGSA done with DIRCO, have you walked with them, what assistance have you provided on the assets? AGSA said it offered assistance and went abroad. She asked if this travel was part of the budget, and whether its presence did not cause overspending and why the support could not be provided from SA. She asked if a shorter time frame than 12 months could not be implemented for audit action plans.

Mr Zikode replied that AGSA had walked with the department regarding the assets, when DIRCO got its first qualification in 2013-14, AGSA offered to go and inspect how DIRCO conducts their monthly physical certification of assets. AGSA could inspect the process itself to identify where the gaps occurred. That offer was initially accepted but when the time came to inspect, the whole process was stopped.

After the second qualification in 2014-15, AGSA had about four to five engagements, two with the finance team and three with the CFO. The purpose of these engagements were to note where their action plans were correct and if not where they could be improved upon. The department was supposed to select three missions, one in Africa, one in Asia and one in Europe and send the dates of asset verification. From that selection the Department would pay for the flights and AGSA would pay for everything else.

He said that, yes, there were time frames given and the action plans were received. The key controls on slide nine indicate that there are a number of issues that we looked at. When we look at leadership, we look at the framework, the policies, and governance strengths. When we look at financial and performance management, this is the day to day operations and how do these things occur? When looking at the governance part, we look at whether they have internal audits, do they have a risk management process in place, is it capacitated? You might find that when it comes to those areas, they are in place and there are policies and direction and guidance. However, the implementation is where the problems come in.

Mr M Maila (ANC) thanked AGSA for a presentation that had opened their eyes. His concern was the audit action plans. Was AGSA able to point out to DIRCO that the recurring problem is about not remedying the root causes? Do we have a criterion that differentiates heritage assets from other assets that DIRCO can use as reference?

Mr Zikode stated that AGSA did evaluate the action plan, and did provide advice to DIRCO as to how they were not addressing the problems. The issue was that DIRCO was not providing the level of assurance needed by AGSA when it came to assets. AGSA would give DIRCO scanners to scan the assets at the missions so they could automatically update the asset register. The limitation there was that some of the barcodes fall off and DIRCO which replaces and rescans and this creates a duplication because there is no process to remove the existing barcode from the asset register.

The second issue was that some of the officials at the missions would not allow those tasked with the responsibility of doing asset verification to enter their rooms and scan the assets because they would say that officials are invading their privacy. These issues were raised with management. Further if you scan your assets at the mission and you later learn that there is a difference with what head office has, there has to be a reconciliation process so that registers can be updated. If that process is not implemented, you will have a problem. Mr Zikode explained that National Treasury has prescribed the modified cache standards. It gives examples of the criteria that would determine what a heritage asset is.

Mr S Mokgalapa (DA) also welcomed the presentation. He said it seemed to be a broken record because they had heard it for the last three years and it looks as if DIRCO is going nowhere slowly. He acknowledged that something needs to change. When looking at the root causes, these are serial. Last year AGSA spoke about slow response to management, key officials lacking appropriate management. This year AGSA pointed to instability and vacancies in key positions. Are you saying lack of appropriate competencies or lack of filling vacancies? AGSA has been very consistent about slow response and lack of constant management as well as the SCM non-compliance in procurement. However, on assets and heritage assets, what must DIRCO do to quantify the heritage assets and who must be responsible for the quantification? Lastly, when you engaged the Minister, what was the response from the Ministry about these root causes?

Mr Zikode addressed the valuing of assets, the first step is to assess all the assets that you have and see what is a heritage asset and then you bring an expert in to evaluate heritage assets. The only time you will argue about the value is when you are giving values to heritage assets but using a property evaluator because he does not have the expertise to do so. The issue at hand is not the values but it is the assessment and the classification.

Mr Zikode said the Minister shared the same concerns as the Committee. She also does not understand why these issues are reoccurring and she suggested a workshop on how to best address these issues and provide some guidance. A workshop was held with management but this time we did not say to management that they need to give us their action plan. We instead brought a presentation on how we think they could best address the issues. The next step is now to hold the workshop with management and the audit committee so that when the audit committee exercises assurance and oversight they can request regular feedback from those particular sections.

Mr L Mpumlwana (ANC) asked AGSA for clarity around what it meant by poor performance, are you saying that people are being paid for not doing their work? Secondly, which section is guilty of poor performance? Thirdly, you highlight that the internal audit section is not properly staffed, what do you mean, are you questioning the qualifications of the staff there? Mr Mpumlwana also raised the heritage assets, and asked why AGSA felt that their word was better than that of a department on this.

Mr Zikode replied that AGSA evaluates against the framework and if there no compliance then AGSA addresses it based on that. On non-compliance, it is defined in the PFMA and what it says is that if you have a particular regulation or law that you need to comply with and if you do not comply with it, it is simply termed non-compliance and that is not terminology drafted by the Auditor-General. Our task is to test whether you complied with the process and report where you did not comply.

On the internal audit, it is the number of people in that unit, it is under staffed, it is not the qualifications. We look at how many people would be sufficient to undertake the internal audit when looking at how big the department is. On lending the department an expert, that would depend on the requirements of the PMFA read with the Public Audit Act, in the sense that the Auditor-General needs to be independent at all times.

On whether the Minister is relaxed, the Minister can exercise oversight up to a certain point but when you look at the accounting issues that is why you have a CFO who needs to be a specialist in that area to advise the Minister on what is happening on the ground and if the CFO needs assistance to deal with it, then the CFO needs to ask for assistance from the Minister to get the buy-in of the whole department.

Mr Mpumlwana pointed out that AGSA does not come cheap to departments and this basically what is the problem. Departments think twice before they engage AGSA and AGSA sometimes costs more than auditors from accounting firms and there is no competition and you have to accept the price. That could be one of the reasons why the departments cannot walk with AGSA. He was unclear about the qualification of assets. AGSA had explained that it is not because those assets disappeared but instead it could be that there was a duplication of assets.

Mr Zikode replied that, yes, there are assets of other departments that AGSA normally picks up. However, when AGSA evaluates the misstatements for DIRCO they do not include what does not belong to them. These are the principles of asset management, to be able to account for your assets, know where they are, able to account for them and safeguard them.

Mr Mokgalapa asked to be allowed to rephrase the question in terms of AGSA’s offer to assist DIRCO, and asked that in its offering who was carrying the cost? Also regarding the outcome of the meeting that AGSA had with senior management, were there time frames and action plans? He asked where the problem is if you offered assistance. He asked what had been picked up about fruitless and wasteful expenditure as it has a reoccurring problem and if there were new issues or if they were the same issues picked up in other years. Lastly, in terms of the other departments like Arts and Culture who have succeeded, have you offered DICRO these practices?

Mr Zikode answered that, yes, AGSA did agree with DIRCO and AGSA was given certain documentation, and as said earlier AGSA did point out what the problems were in the documents. There were time frames and action plans were received. He pointed to page nine where AGSA spoke of fruitless and wasteful expenditure and it highlights that DIRCO did not take effective steps to prevent this and it is normally due to non compliance with SCM regulations. They have engaged with DIRCO and the engagement was on a number of areas where they could get assistance. We did provide some of the detailing in terms of who they could talk to in that particular area just to ensure that they are addressing that particular area.

Material misstatement is an audit term. If you are accounting for certain things, you need to account for those things in line with the modified cache standard. For example, if you have a building, you have to account for it as a building and not as something else. If you are accounting for things incorrectly, you are therefore creating a misstatement.

Process to alleviate the impact of foreign exchange fluctuations on DIRCO budget: National Treasury
Ms Gillian Wilson, Chief Director: Financial Sector Conduct, National Treasury, explained that a presentation was prepared on the basis of a request from the Committee. The briefing covered the budget performance, operational areas that the foreign exchange has an impact on, calculation of the budget exchange rate, management of the foreign exchange movement and associated impact, management of foreign exchange risks.

Budget performance for 2015/16 shows there was an over expenditure of R133 million. This was classified as an unauthorized expenditure and resulted in total expenditure against the budget of 102%. The over expenditure relates to the exchange rate fluctuations in the last six months and is also linked to expenditure of foreign missions abroad and the increase of membership contribution fees to multilateral organisations and foreign government institutions. It is very clear that the foreign exchange exposure risk is very significant in this department, 73.8% of the budget of DIRCO is spent on foreign service-related expenditure and also on transfers to foreign governments and international institutions.  

The depreciation of the rand is in response to the developments in domestic and external environments. What is also important to note, is that when the rand depreciates, DIRCO can buy less with the money than what was budgeted for. The impact of the fluctuations in the currency leads to a shortfall and that is the difference between the rand denomination appropriation and foreign currency denominations. Thus, the difference between what is budgeted for and the spot rate results in a budget shortfall. In 2015/16, DIRCO received R720 million as supplementary funding. The unauthorised expenditure is after the adjustment of R720 million. DIRCO managed to generate savings as there were cost containment efforts on travel and subsistence and also restriction on the number of delegations going to the African Union and the Forum on China-Africa Cooperation Summits. This resulted in savings of R49.6 million which is very little in relation to their total spending and is less than 1% of the budget.

When looking at the different operational areas of foreign exchange exposure, there are the Foreign Service Dispensation (FSD), the Locally Recruited Personnel Staff (LRP), Operating Payments: Foreign Office Leases and Municipal Rates, Maintenance and Refurbishment of State-Owned International Property Portfolio and Transfers to Foreign Governments and International Organisations.

 

• Foreign Service Dispensation (FSD)
The annual cost of living adjustments review which is called COLA is jointly determined by the Department of Public Service and Administration and DIRCO. The COLA is reviewed on an annual basis and presented to DIRCO and DIRCO signs off on the changes and it is implemented. What has been picked up is that DIRCO does not really understand the calculations. This has resulted in a task group being formed between DIRCO, the National Treasury. The aim was to workshop that review to see how COLA is calculated but unfortunately the workshop has been postponed constantly. It is therefore disturbing that DIRCO signs off on the annual review but they do not understand how COLA is calculated and why there are differences in the increases for missions. The FSD also includes expenses related to schooling of dependent children and medical and related services, accommodation, hardship and travel allowances. All of that is included in COLA. Currently there are 776 South African transferred officials abroad just from DIRCO and this excludes partner departments who are eligible in terms of the stated benefits and allowances under the foreign services dispensation policy. The problem relating to the exchange risk is also being experienced by other departments just like DIRCO. It is important to note that the payments of goods and services and accommodation for transferred officials are incurred in foreign currency.

• Locally Recruited Personnel (LRPs)
This refers to support and administrative services staff of a mission. They include immigration clerks, housekeeping, library, interpretative and translation services, communication and marketing. It is very important to note that the LRP are not encouraged to be involved in the core function of the mission. The major problem with LRP is that the basic conditions of employment are typically not complementary to those prescribed in terms of the South African public service, so the labour laws are in accordance with the mission countries and this presents problems in terms of the length of service and conditions for termination of services which is not the same as that of South Africa. This therefore results in ambiguous exit strategies being employed per locality.

In 2015/16 the head count of LRPs stood at 1 698 posts and accounted for R616.4 million which is very large in relation to the transfer officials of DIRCO which is almost double. It is also important to note that DIRCO has implemented strategies to reduce the staff but it is more of a short term strategy, they need to bring a long term strategy to reduce these personnel.

• Operating Payments: Foreign Office Leases and Municipal Rates
Currently DIRCO has a rented property portfolio of 700 properties in different countries, the rental cost and related costs incurred are substantial and have attributed to the shortfall in funding during 2015/16. Presently DIRCO is spending R962 million on operational leases for rented chanceries, residences and offices.

In most cases DIRCO does not have a control on the increases in the leases and that puts pressure on the budget. Other problems are the inadequate regulatory frameworks, the absence of market established pricing models, especially in the African market where rental housing industry is controlled by monopolies and cartels who charge astronomical fees. Also linked to this is state owned international property in foreign countries, currently DIRCO has 133 offices and residential accommodation with a current market value of R4.6 billion. Most of these properties were acquired in the 1930s and 1940s in the European and American regions and because the properties are very old it has led to high maintenance, upgrading and refurbishment costs. In 2015/16 DIRCO spent over R209.3 million towards the acquisition of new infrastructure, maintenance, upgrading, renovation and refurbishment of state owned chanceries.

• Transfers to foreign governments and international organisations.
The spending on international governments and international organisations amounted to R766.6 million which was more than the available budget of R734.3 million. The increase was mainly because of the new scale of assessment for the African Union, inflationary related increase in transfers to the South African Development Community and the United Nations.

• Difference between budgeted rate used to compile the budget and the actual spot rate
When National Treasury compiled the budget we got input from the Assets and Liability Division. The Office of the Accountant General also gave their input, as well as from the Budget Office.

In August 2011, a framework was developed by National Treasury to assist in foreign exchange management and it involved the South African Reserve Bank (SARB) and was approved in 2011. However,  when Treasury had a discussion with SARB, it indicated that it did not have the appropriate system to deal with the framework or implement it. What Treasury wanted to do with the new framework, was to shift the risk from DIRCO to SARB. The bank had a problem with that because they felt that they are not responsible for budgets of departments and that it goes beyond their mandate. Currently there are two US dollar accounts on behalf of government with SARB, one is Foreign Currency Investment and the other is a Foreign Currency Accumulation account for expenditure. Regarding the budgeting aspect, the foreign exchange profit and losses are treated on budget and are not being considered as an extra ordinary payment.

The shortfall in the budget is dealt with during the annual budget adjustment process. Under the fiscal framework, National Treasury introduced the expenditure ceiling in the 2012 budget. This represents the core spending over which government has direct legislative authority. With DIRCO, it is difficult to keep to the ceiling because of the weakening of the rand which causes a significant risk to the fiscal framework. From the accounting side, the Office of the Accountant General in National Treasury developed certain principles and practices in the PFMA. This forms part of the regulations, and states that any expenditure in foreign currency needs to be recognised at the spot rate.

It also gives guidelines on how it should be dealt with on an accounting basis. On the department management of the foreign exchange risk, an important point is that in terms of s 66(2) of the PMFA, the department cannot get involved in exchange rate hedging arrangements without the prior written approval of the Minister. This means that DIRCO cannot go to committing its budget to a contingency liability. On foreign exchange risk management, DIRCO should ensure that adequate internal risk exposure management systems are in place. It is not clear whether DIRCO has these systems in place. DIRCO should also efficiently and effectively manage the risks associated with transacting and recording of the foreign exchange. They should also develop appropriate and accurate early warning signal and mitigating measures and it needs to be done when the expenditure occurs.

Proposals for the management of foreign exchange risk are mainly long term measures, policy reform and strategies. Firstly, it is important for DIRCO to develop strategies to reduce the maintenance cost of foreign property; it should have a long term property acquisition and maintenance strategy. Secondly DIRCO should liaise with DPSA on reviewing the foreign services dispensation of basket of goods and services. We need to look at different elements in the dispensation like education, and medical aid. DIRCO should also look at a reduction of voluntary membership fee contribution transfer payments. The Department should communicate to the different international organisations what is affordable in terms of what they have in their budget. It is important that DIRCO develop a strategy that deals with the rationalisation of Locally Recruited Personnel. There was a reduction but it was more on a short term basis and Treasury wants a more long term strategy. DIRCO should develop a long-term view and strategic rationalisation of missions and de-scaling of services. They should look at reducing the number of missions and posted officials to affordable levels.

• African Renaissance and International Cooperation Fund (ARF)
Ms Gcobisa Matshaya, Treasury Senior Budget Analyst, said ARF derives its revenue from the parliamentary appropriation and interest generated from investments with the South African Reserve Bank’s cooperation. Over the audited period 2014/15 revenue had declined from R390.1 million in 2014/15 to R289.4 million in 2015/16 at an annual average rate of 25.8%. This is largely due to Cabinet’s approved reductions of R530 million over the medium term on transfers of the Fund. In 2015/16 the ARF received R145.6 million in transfer payments from government. Expenditure for local and foreign aid assistance decreased from R208.8 million in 2014/15 to R199.2 million for 2015/16. The expenditure incurred by the Fund was mainly to provide for the economic stimulus packages to Cuba, R7.2 million was incurred for the Timbuktu Manuscript Project and technical support for the third general elections of Burundi in the region of R30 million and the deployment of the Cuban medical brigade in Sierra Leone of R3.9 million. As of 31 March 2016 the fund had a net cash flow from operating activities of R133.3 million which Treasury granted approval to retain and it had closed its books with a cash and cash equivalent balance of R2.3 billion.

Discussion
Mr Mokgalapa acknowledged the presentation made by Treasury and advised that it is something they will pick up with DIRCO. Treasury mentioned that SARB has indicated that it is not in their mandate to regulate the budget of departments when it comes to foreign currency fluctuations. He asked what has been the interaction between Treasury and SARB and DIRCO because the bone of contention is around that, how do we manage the foreign currency fluctuations. There is not much we can do as the market fluctuates but in terms of your discussions what are the outcomes to mitigate this?

Secondly, in your engagement with DIRCO, what has been their response to the proposals you have put forward, such as buying property rather than renting and the reduction of voluntary membership and rationalisation of missions and LRPs?

Ms Wilson replied that the presentation was difficult to do because they do not really bring a solution and it feels more like just passing the ball around from National Treasury to DIRCO and DIRCO to Treasury. It is important to acknowledge that both Treasury and DIRCO have a role to play and a solution needs to be reached by all role players.

She stated that to implement the framework, there is a business case for the framework that can be made available to the Committee. A policy shift is needed from both National Treasury and SARB. Without the SARB coming on board, there will not be a solution. The mandate issue is a stumbling block but it was not the main stumbling block. The main stumbling block was to develop a system that can deal with the money going through the dollar account so that there can be real time calculations of the differences between the budgeted rate and the spot rate. What needs to be looked at is what system in terms of configuration and development can be implemented by SARB.

On the issue of property, there are program meetings with DIRCO every year, and we request a comprehensive strategy as to how they are going to deal with the foreign property and it seems like DIRCO wants to implement a strategy on a pilot basis. They want to focus on New York and acquire land and develop buildings but Treasury is on the opinion that before you can develop a pilot, you need to have a comprehensive strategy on how you are going to deal with the leases and state owned property and it seems like there has not been any progress made in terms of that strategy.

On the benchmarking of the LRPs, we did not look at what the practices of other countries are but South Africa has a very unique problem when it comes to LRPs and DIRCO also realizes that they can rationalize most of the posts occupied by the LRPs. A strategy could be developed over the long term by looking at combining multiple posts to become one post.

Ms Matshaya elaborated on the LRP issue and stated that Treasury had engaged with DIRCO as Ms Wilson noted. DIRCO has indicated that they would be committing to some kind of reform in terms of the LRP staff complement. Some of the considerations mentioned were layoffs over the medium term and the suspension of vacant positions, as well as a strategy for any redundant posts. DIRCO indicated to Treasury that at 31 March 2016, it had a head count of 1 955 and they had vacancies of 146 posts and they had no intention of filling those vacant posts. DIRCO highlighted that they had inherited the LRP staff complement from the former Foreign Affairs department and they had not done a process of review of the establishment since then. They will be committing to these rationalising processes and the task team will be looking into rightsizing and possibly exit strategies that will need to be negotiated with the affected LRPs. DIRCO also indicated that when they did do a preliminary engagement with affected employees that they had earmarked. DIRCO did indicate that they would want some kind of guarantee from government around specific allowances, such as the house allowance. They had asked that even though they would take some kind of severance package that at least that form of allowance would still be applicable going forward.

Mr Radebe agreed with Mr Mokgalapa that the presentation was good and that it acknowledges the challenges DIRCO is facing around fluctuations of currency. We know that from the last time we passed the budget in June 2016 until now the rand has deteriorated. The other problem, especially around the audit qualifications was irregular spending, which amounts to more than R300 million. The issue here is that, we know very well that when we go to missions, we need to purchase goods. Did Treasury take into account when one has to deviate from procedure and explain how that should be reported and when?

Secondly, Treasury and DIRCO are determined by the Constitution. The head of foreign policy is the President and the execution is going to be DIRCO. Do you not think that your recommendations or proposals are encroaching on their territory? The issue around the strategy of missions is the National Development Plan is at the centre for bringing a better life for people by increasing employment by 2030. To do that, it means that we need to trade more. If we rationalise the missions, it means that we are capping ourselves.

On Treasury’s proposals possibly encroaching on DIRCO territory, Ms Matshaya replied that the proposals on foreign exchange risk had been presented at an engagement with DIRCO and it too raised the issue of infringement of their mandate and that some of the proposals require executive decision making. Treasury highlighted the key cost drivers that are causing the foreign exchange risk problems. DIRCO indicated that they had done an exercise internally and they are currently working on a report internally on proposals for rationalisation of missions and it would feed into the kind of proposals Treasury was advocating. From where we stand we acknowledge that this is still a function of DIRCO and a function of the executive. We are not by any way imposing an agenda upon them but from a fiscal point of view we were looking at the cost drivers.

On the irregular expenditure, Ms Wilson replied it is important to note that there is a CFO Forum and they meet on monthly basis. In this Forum they do take the CFOs through the different regulations and the changes in regulations and procedures. So, yes, there is a forum that workshops the different regulations.

Mr Maila welcomed the recommendations that Treasury has made. The presentation will assist when looking at the foreign currency bill and he noted that foreign exchange has and will always be our problem. He referred to the comment that DIRCO does not understand how the COLA budget is calculated, and asked where the challenge is with that. Ms Wilson stated that when it comes to the calculations, there might be a lack of skill. It is important that we look at how the calculation is done because on Treasury’s side they need to put extra measures in place into checking how the calculations have been done. DIRCO is relying on the fact that if they have a loss, additional money will be given.

The Chairperson asked who constituted the task group and had they learnt anything from the best practice of other countries.

Ms Wilson explained that the task group consisted of DIRCO, National Treasury and DPSA. But it is from the DPSA side that the workshops are always cancelled. It is a good suggestion to include the other departments so that they too can have an understanding of the calculations. She indicated that they had looked at Australia and found that they like South Africa took the risks on budget like DIRCO. Treasury has looked at Australia in terms of how they deal with the risk exposure. The impact is much larger in South Africa in comparison to Australia; Australia does it like South Africa and takes the risk on budget.

The Chairperson thanked Treasury and the meeting was adjourned.

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