Department of Economic Development & Tourism, Wesgro, Saldanha Bay IDZ 2019/20 audit

Meeting report

The session between the Committee and AGSA, at the beginning of the meeting was closed to the public. In the open meeting, the Chairperson explained that the Committee would deal with Sections C and E of each of the Annual Reports. Members would be permitted to ask questions first, followed by the media and members of the public if present. In the absence of the Western Cape Minister, Mr Solly Fourie, as Head of Department made opening remarks.

Discussion on Section C
Ms N Nkondlo (ANC) said that the risk to financial viability was mentioned amongst Wesgro’s strategic risks. She asked about the chances of the situation changing because when one looks at the financials, the biggest chunk sustaining it is government transfers or grants. She asked if there is the conversation to change the business model of Wesgro. On page 72 on BBBEE, she asked about its BBBEE compliance.

On Saldanha Bay IDZ board profile and complexion, one can say it is way ahead in ticking the right boxes as a diverse team. She asked about gender considerations given the current environment. The BBBEE table on page 61 was all numbers, she asked what they mean for BBBEE alignment. She asked where the Corporate Social Investment (CSI) of the IDZ is located, whether it is done as a special project and how it functions within the entity. She wanted to get a better understanding of CSI and its programmes, functions and what has been spent on social responsibility.

On DEDAT on page 139, GOVCOM attendance has been poor. She asked for an explanation and for the meaning of ‘risk of leadership’ and what mitigating interventions have been put in place. She asked if the Department has looked at the investment and programme money it spends on SMMEs versus commercial entities. She asked for an update on how far along the six fraud cases are.

Ms N Makamba-Botya (EFF) noticed that every department contained the same statement about their Annual Report, appearing on page 141. On paper, it seems there is an approved fraud and corruption strategy that is proactive. However, in reality, almost every department reports on cases so are these so-called fraud and corruption prevention mechanisms effective? She asked DEDAT to explain the cases that appear on page 142 and their current status and, if resolved, what the outcomes were. On page 61, Saldanha Bay IDZ BBBEE compliance the performance information in the first five columns has same response throughout. She asked how far the IDZ is with drafting and implementing such policies.

DEDAT response
On GOVCOM participation, Mr Solly Fourie, DEDAT Head of Department, replied that the Department did have a resignation towards the end of the 2019 financial year and an acting person was instated which caused a delay. However, all GOVCOM people have now been instated and non-attendance has been corrected.

On the support of SMMEs, DEDAT has a complete programme and sub-programme that deals with enterprise development and the support to SMMEs and a bulk of that programme’s money goes to SMME development and support and it reports frequently on that and results are available in the Annual Report. There is a very strong interdepartmental relationship between DEDAT and the Department of the Premier. Jointly, the departments have developed the preferential procurement or economic procurement policy that enables SMMEs to be ready to take on government tenders. DEDAT, together with the Provincial Treasury, has helped firms to register on the supplier database so they are ready for tender applications. At the start of 2019/20, DEDAT had one fraud and corruption case. During the year, it added three cases.

• One of the four cases was closed as it was a duplicate reported by a whistleblower and department referral.

• The second case investigation revealed that the service provider had misrepresented to DEDAT that it would not be using subcontractors. However, when forensics went into the matter, there was insufficient evidence to confirm if the misrepresentation was made intentionally to deceive the department. In the end, Provincial Forensic Services (PFS) recommended that DEDAT consider if the failure to take appropriate action at the time resulted in possible irregular expenditure and in consultation with legal services, the Department exercise its Regulation 14 of the Preferential Procurement Act powers. It did this and the matter is still under legal review.

• The third case was referred to the PFS as a potential conflict of interest in the contract award to a service provider. The investigation revealed that the service provider contract would have ended on 31 March but was extended for three months until 30 June. After the former project manager motivated for an extension due to procurement delays, the service provider continued services for July and August 2019 in the absence of a service level agreement. The failure to ensure a valid SLA was in place may have exposed DEDAT to legal risk but there was a motivation for this natural continuation to avoid delays. PFS found that whereas discussions of an employment offer between the former manager and service provider took place after the contract award, it could find no evidence that the employment offer was used as an inducement to award the contract. Nor could it find evidence of misrepresentation in the capacity gap analysis in the technical requirements. The documentary evidence confirmed that the former manager exercised a right to pursue further employment after being unsuccessful in the application for employment with DEDAT and after procurement and contractual processes with the service provider had been completed. No evidence was found of the alleged conflict of interest. The SIU recommended to address the risk that DEDAT needs to tighten up service level agreements with service providers in future even in exceptional circumstances where services continued after the expiry of a contract.

• The last open case involved a former DEDAT official was awarded two tender bids. The investigation revealed that the correct procurement process was followed for both bids. However PFS observed that the official was the project manager on the project linked to the bids prior to their designation which created a perceived advantage towards that company and an unfairness to other bidders. PFS noted that the DEDAT finance policy does not specifically provide guidance about former employees bidding for a contract particularly where they may have had access to confidential bidding information. PFS recommended that DEDAT amend the financial policy to restrict former employees from bidding for contracts in which they were initially involved or had access to confidential bidding information which may give them a real or perceived advantage. All the four cases were investigated. At the time of the Annual Report, the cases had not been finalised. Now one case is still outstanding and a new case that was registered is under investigation.

Mr Fourie replied that the 'risk of leadership' only related to the fact that the HOD contract came to an end in April 2019 and the replacement process is still ongoing. There is always a risk but the HOD is involved in an extended contract period until 31 March 2021. This will be taken up further in discussions with the HOD and the Minister on leadership continuation.

Wesgro response
Mr Angelo Manzoni, Wesgro CEO, replied that it is important to note that the risks listed on page 71 are very high-level systemic risks and are not the kind of risks that can be fully mitigated or put to bed, they are probably baked into the system but do need to be continually managed. These risks include maintenance of stakeholder relationships, deteriorating South African investment climate, endemic risks, regulatory risks, and digital transformation.

On the financial viability of Wesgro, the entity is a Schedule 3C public entity which means it is a delivery agent for the province but with the model that is very much private sector-led which is a very robust and long-lasting model. The entity flags the financial viability risk because it takes note of the deteriorating fiscal climate in the country and it has had some robust conversations with its major funders, the biggest being the Province followed by the City of Cape Town and a variety of funders from across different departments but also from some private sector players. For every R4 of public sector funding, R1 is crowded in from private sector funding. There are programmes that Wesgro works on to secure private sector funding. Wesgro continually has to make the case for delivery against funding. However, the PGN tech engagement went very well considering the difficult fiscal climate. This is a risk Wesgro will have to manage every year but he does not believe that anything is of major concern within the agency. Wesgro’s BBBEE policies are substantial and comprehensive and are updated on an annual basis. It is currently doing a one-off review of governance in all those policies. He does not believe that there are any weaknesses in that system.

Ms Kholeka Zama, Wesgro CFO, replied that although through the Provincial Treasury Accountant General, the BBBEE compliance was ruled as not yet in scope at Wesgro, the process had been initiated. Based on the process, the ownership component is not applicable. For the enterprise supplier development component, Wesgro is 60% compliant. On socio economic development it is 100% compliant. The managerial control component is 40% compliant. Where there is big non-compliance is the skills development component. The reason for that is not because the entity is not spending on skills development but because it is not currently registered with a SETA and the reason for that is due to how diverse the Wesgro mandates are. It needed to identify which SETA to link up with, because there is investment promotion, trade, tourism and film and that complexity means it did not quite fit with each of the various SETAs. Thus points could not be allocated for what Wesgro had spent on skills development. In current engagements, it has agreed that it will link with a SETA linked to investment promotion and are currently registering through that SETA. Therefore by the time BBBEE is reviewed, Wesgro is compliant with the skills development component which is quite significant as it is 25% of the BBBEE score.

Mr Fourie wanted to emphasise that none of the cases which had been referred to the investigative unit had been proven to be fraud. It is important to note that one of the mitigating vehicles used to prevent fraud is the utilisation of investigations from the forensic investigative units.

Saldanha Bay IDZ response
The Saldanha Bay IDZ board chairperson, Dr Johann Stegmann, replied that the board composition is something that the entity has been driving quite seriously, particularly on gender. On the board there is sometimes a bit of a challenge because the majorities are nominated by institutional members of the board such as DTAC, Transnet or municipalities. But it is a continual search to ensure there is the right balance of skills and other compositions necessary for the board to fulfil its functions, particularly when there are term changes and also for the stage IDZ currently finds itself in.

Mr Dale Paulse, Supply Chain Manager: SBIDZ, said that previously the IDZ had a BEE certificate which expired in December 2020. At that stage it approached Provincial Treasury to ascertain if it can continue with the process of getting a new certificate. It was informed that DTI and National Treasury are embarking on a plan to get a policy together to have government become compliant in terms of the applicable regulation. The SBIDZ management team is in regular contact with Provincial Treasury to ascertain whether to continue going forward with the new certificate process and develop a framework and policy. The SBIDZ team is currently waiting on guidance from DTI and National Treasury.

Ms Kaashifah Beukes, SBIDZ CEO, replied that there is indeed no stated CSI policy for the company. This is because the IDZ is of the view that it cannot have a CSI policy until it is financially self-sustaining. All of its socio-economic development work falls within the development programmes unit which is funded on a proposal basis. It would be very difficult to have a policy right now until SBIDZ is more financially secure.

Ms Beukes noted the activities it has carried out in conjunction with the municipality – as they are custodians in terms of identifying civic need with the Western Cape government, particularly the Department of Social Development through the Whole of Society Approach (WoSa) structure. After the year under review, SBIDZ has embarked on a high school programme. The report on the innovation campus was tabled on 11 September 2020. The innovation project is about readying youth for digital skills that industry will require in the future. In 2020, it initiated and successfully concluded a teacher development programme where 18 Mathematics teachers from Grades 8 and 9 from nine schools in the Saldanha Bay area was completed. They were certified in dynamic software which is pivotal for the digital delivery of Mathematics that the IDZ has developed in partnership with the Department of Education. There would be more reference to this project in the 2020/21 Annual Report.

Ms Makamba-Botya asked the CEO for a timeframe for the CSI policy that is being drafted.

Ms Beukes replied that SBIDZ has the objective and priority to reach financial break-even as per its shareholders’ compact with the province by 1 April 2023, taking into consideration all the market effects pre- and post-COVID. SBIDZ is committed to achieving that priority and whilst achieving that financial and commercial sustainability also continuing with the development programmes it is undertaking in the community, specifically focused on local SMME development and contracted development.

Discussion on Section E
Ms D Baartman (DA) congratulated DEDAT on its clean audit and thanked it for including the recommendations of the Committee in the notes it has added to the Annual Report including the note on impairment which the Committee has also gone through in detail in previous meetings. On the Cape Town International Convention Centre (CTICC) investment, the note states that COVID will have an impact on investment. She asked the HOD to elaborate on that as there is not much information on that point.

When looking at the allocated grants on pages 118 to 120, interest is accrued on some but not on others. She asked about the difference between the interest received on some but not others as they all look like the same type of grant or financial instrument. Security for Saldanha Bay IDZ has almost tripled and she asked for the reasons for that. She asked how the table on page 123 should be read as there seems to be a printing error.

Ms Baartman said that that some Wesgro internal controls were deficient. She wanted to know what AGSA recommendations were for fixing that in future and what measures would be put in place for companies that had not made declarations. She asked for the reasons that insurance had increased.

Mr D America (DA) noted from the Annual Report that the Wesgro Chief Marketing Officer, Ms Judy Lane, resigned, and her remuneration was listed. Below that there is a Chief Marketing Officer, Ms Margaret Whitehouse, and he assumed she replaced Ms Lane and that her remuneration was for a period of the financial year because it was very low in comparison. He asked for clarity. Consulting fees increased considerably to almost threefold. Workshops and seminars also increased by close to 100%. What had given rise to this increase. On page 117 the explanatory note stated that contingent liability exists for retention of surplus funds. He asked why the retention of surplus funds is classified as a contingent liability as he was not aware of liabilities existing that need to be met in the future. He noted the two amounts do not add to R965 000 which may be a typographical error.

Ms Nkondlo asked IDZ to explain the composition of public contributions. On page 91, the interest is a negative, she asked what that means. On page 224, DEDAT Programme 6 had underspending and she wanted clarity on the challenges for those transfers as it seems there were some issues with particular projects. In Programme 5, she asked about the underspending due to a change in economic policy which affected the budget, and how that was managed by DEDAT. Page 231 mentions staff decreased. She asked if that means there was an exit of 30 staff members and the reasons for the huge numbers. She asked DEDAT to explain the funding expanded by the Provincial Revenue Fund and if it is the same funding received for the skills development programme.

On the Wesgro operating lease liability, she asked what the fixed annual escalation agreement is for the operating lease it has with the Reserve Bank. She asked in what areas Wesgro utilises consultants. She asked for clarity on the contingent liabilities on page 117. She asked about the incentives on page 118 which noted 1.8 to Singapore Airlines for the Cape access route and R35 million for the North America route. She asked who actually pays for this. Is it correct that about R20 million is the cost of the Atlantis SEZ incubation. She asked for the project list of the municipalities and their results.

Mr America said that the audit fees are separated into external and internal. He asked if an external party rendered internal audit services to Wesgro and if that is more cost effective.

DEDAT response
Mr Fourie replied that DEDAT reflected in the financial statements that the effects of COVID on the CTICC were reflected as a post-year adjustment or report, the reason being that COVID hit in March 2020 and the real effects were not quite felt at the time. What is clear is that the effects of the pandemic have significantly impacted not just national conferencing and meetings and incentives and events calendars but also the global calendar and so for CTICC, the COVID impact is very devastating and the CTICC board is currently reviewing its mitigation measures and proposals that need to be put in place. It has engaged with the two major shareholders, City of Cape Town and Western Cape Government, to alert them of the trading cautions envisioned by the board and the various options being considered. The board is in the process of reviewing these options and unfortunately there is no more information on that. However, it is a situation that is worrying for DEDAT, not only for CTICC but also in the context of SCOPA. It is important that this is raised in the meeting, but it also important for the broader economic growth potential of the region as international tourism is a major contributor to the economy. Going forward, DEDAT is going to do everything in its power to ensure it gets a balanced approach between the demands of the need to curb the epidemiological threat of the virus with the effects of the economic challenges on the livelihoods of people.

Mr Rashid Toefy, DEDAT Deputy Director-General: Economic Operations, replied that in Programme 3, there was underspending due to not filling some vacancies. Also the Halaal cluster and supply chain programme was delayed but the Provincial Treasury request to roll over that money was not accepted so some saving had to be declared. The Department was able to complete that project in the financial year with existing funding. Similarly, for Programme 6, delays were experienced due to not filling vacancies but DEDAT was able to complete the cycle route infrastructure project in Swellendam. The Government Technical Advisory Centre (GTAC) funding was earmarked for a project that was complete, but the additional money will be used for the monitoring and evaluation phase.

Ms Mymoena Abrahams, DEDAT CFO, explained that in Note 3 there is an accounting entry about the way the policy works for all merSETA funding. DEDAT is not able to spend that money until it has been voted into DEDAT’s main appropriation by Provincial Treasury. DEDAT transferred the funds into the Provincial Revenue Fund. In 2020/21, the amount was appropriated back into the DEDAT appropriation. In the current financial year, the funding is being used towards the artisan development programme. Note 3 is merely an accounting entry to disclose that process.

Ms Jo-Ann Johnston, DEDAT DDG: Economic Coordination and Stakeholder Engagement, replied that the savings generated in Programme 5 are HR savings linked to compensation of employees (COE). On the change of economic policy, there are shifts and refinements anticipated with new leadership. The Department had budgeted for that but in the end, under the guidance of the minister, a lot of the work was done in-house, DEDAT utilised internal capacity and conducted its own economic consultations across the economy to develop the strategy which resulted in savings. The Western Cape Minister did not, at that time, want something that involved external consultants and research capacity.

Ms Cheryl Julies, DEDAT Director: Strategic and Operational Support, explained that the number of the staff that decreased was due to contract expiry. This is reflected in the HR part of the report and some are resignations that came through during that period.

Saldanha Bay IDZ response
Mr Herman Boneschans, SBIDZ CFO, replied that for every project IDZ gets funding for, there are terms and conditions, and the entity recognises income in terms of those. In certain instances, the interest can be recognised as the entity’s income and in other instances it needs to go to the project itself. When it goes to the project, it is clear that there is interest recognised and where there is not, that means it will be recognised in the income. On disclosure, the financial assets and liabilities table is indeed misleading. If the headings are removed, the table should not be as misleading as the one section speaks to 2019/2020 and directly below that are the 2018/2019 figures as a comparison.

On public sector contributions to the infrastructure programme, SBIDZ had to register a servitude and at year-end had to value that servitude at market value and the re-value of that servitude created an income based on accounting principles but it is not actual income. On the negative interest, no interest has been paid to anyone, that is merely interest income reflected negatively.

Ms Adinda Preller, SBIDZ Executive: Transaction & Investor Support, explained that the IDZ had a security incident at the Saldanha Bay office, which meant that some additional security measures had to be brought in specifically for the offices. It also included the SMME Co-Lab Centre into its security. It does foresee that security will continue to increase in the coming years as it rolls out its International Ship and Port Facility Security (ISPS) and customs control area protocols.

Wesgro response
Mr Manzoni, Wesgro CEO, replied that most of the increases in Wesgro are related to the fact that it was incubating the Atlantis SEZ which was a new operation with new overheads, using new space in the building and the deposit that had to be paid. The SEZ is also intensively using consultants in the early stage and workshops and seminars. Other increases are due to Wesgro stepping up in the workshop and seminar space with events and it created new platforms pre-COVID to do the promotional work.

The partnership with the airlines is fulfilling a substantial financial role. Private sector contributions are earmarked for direct support of airlines. A large portion of that comes from the money Wesgro receives from private sector partners. Even on the public sector side, the burden has been spread across the teams when it comes to the operation costs of the project as well as marketing and support for individual airlines. The project has doubled the number of new non-stop flights to Cape Town over the years up and until the COVID crisis. Wesgro is fairly confident that it will be able to get almost all of them back as it drives recovery. The overwhelming majority of those flights have come on the back of a business case Wesgro has made by showing the benefits to the airline of flying to the destination. The two exceptions listed in the report where the entity matches that business case with an element of financial support, is usually structured around marketing and spending alongside the airline’s marketing to ensure the flight is full. Looking at the proportion of new flights landed which received financial support, it is extremely low and much lower than any equivalent destination globally where the business is largely driven by incentives.

The Annual Report reflects the position that it was in this financial year, since COVID hit. The North America route incentive was renegotiated and the agreement now has two additional clauses. One reduces the commitment down to five million based on the fiscal realities explained. The other is that there is an automatic termination if there is no service from one of those carriers, so Wesgro did the work of covering the public purse in the structuring of that contract.

There are three approaches to working in the municipality that kick in at various stages with Wesgro. The first is that Wesgro is the agency for the entire province, both across its economic and tourism mandate. That means it is responsible for promoting tourism, landing investment, driving exports and landing film production across the whole of the Western Cape. Many hours have been spent in front of the WCPP reflecting on the Wesgro's efforts to land work across the province and it is available to any municipal economic team that needs its support in external tourism and economic work.

Over the years Wesgro has battled with the size of the province and the size of its headcount to get full coverage of the province as it is a big one with lots of demands. Wesgro has established district units of two managers dedicated to the non-metro municipalities in the province. Those managers do not do any work within the metro. They are one of the few parts of government that have, in some sense, benefitted from COVID as their work has become entirely remote and virtual, which means they can do many more engagements across the municipalities.

On municipal contracts, in Saldanha Bay, Wesgro ran a dedicated export intervention for companies in Saldanha to help them grow their exports. It also did a locations piece with its film team promoting Saldanha as a film location. It is working with the Matzikama municipality on an aquaculture project and helped write a prospectus to land a new investor there. It worked on an investment promotion prospectus and ran a dedicated campaign for investing in George. In Knysna it stepped in on the municipality’s request to take over Visit Knysna, the LTO on a short-term contract. In Drakenstein, it worked on a technology and film promotion. All of the contracts are at the deeper level where there is individual funded work for the municipality on a specific project, but the projects do not take away from either the work of the district unit or the offer made to every municipality.

Mr Manzoni replied that insurance costs went up largely because of the SEZ. He confirmed the assumption about the Chief Marketing Officers. There were significant project consulting fees. On internal and external audit fees, the external audit is done by the Auditor General. The internal audit fees are for the current internal audit partner, BDO which advises the Audit Committee and staff on audit matters internally to help prepare for the external audit.

Ms Zama, Wesgro CFO, replied about the internal control relating to the international supplier. The Auditor General indicated in the prior year that although Wesgro does obtain declaration of interest from local suppliers; it also needed to do it for international suppliers. It implemented that control as of 1 September 2019. What was selected during the 2019/20 audit were items that fell before the control was implemented. She can confirm that the control is in place and it is effective – Wesgro does obtain declaration of interest for both local and international suppliers.

On consulting fees, workshops, seminars and marketing fees, looking at Wesgro’s accounting notes, they are broken up into programme expenses which are the Wesgro expenses and the project expenses. Further, segment reporting has been done on page 127 where in 2018/2019, Atlantis SEZ was not a major expenditure component of Wesgro revenue but on page 126 it is included to show which costs specifically relate to Atlantis SEZ that would have caused a variation. Workshops and seminars decreased against marketing, due to the strategy change alignment to the budget line when the Khulisa strategy finished once it completed its five-year term. The new strategy, when it came to trade shows, the trade shows were aligned to a marketing cost component which is why it appears as though there is a swing between those two lines.

The note on contingent liabilities, on page 117, can be misleading because it is covering two items, contingent liabilities and commitments. The contingent liability is the current component where if there are any surpluses the entity would like to retain, retaining this surplus is contingent against the approval of the Provincial Treasury. Every year the audit is done prior to the entity receiving approval of the surplus retention. For the commitments component, which is a prior year amount, there is a note that states that it is in relation to the purchases that were open, one relating to YPO and the other to an Atlantis SEZ contribution towards work that GreenCape was doing.

Ms Nkondlo asked if she is interpreting the Auditor General response correctly on the lack of disclosure. She asked Wesgro why the control measures were put in placed only when the matter became an audit query. From what she is referencing, this is something that was raised with Wesgro previously, which would mean it was not attended to until it became an audit query.

Ms Zama replied that it was attended to in the prior year audit when it became an audit query at that point. That is why she referenced 1 September 2019 as the date Wesgro effected control for international suppliers. As of now, the control is in place but was not implemented prior to September 2019. The financial year under review is 1 April 2019 to 31 March 2020. What AGSA indicated, is that when they sampled the pre-September 2019 international supplier purchases, this was still identified as an exception. Wesgro indicated to AGSA that as they were repeat suppliers, it does have subsequent declarations of interest for the current year. However, AGSA noted that one cannot apply a control subsequently. Thus the subsequent control would be applicable for the new financial year but the declaration obtained in the prior year would still be identified as an exception regardless of the same suppliers having done the declaration subsequently.

The Chairperson said that when it comes to procurement, there were some service providers or bidders who did not comply with the standard required in the audit report. He asked the cause of this.

Mr Manzoni said that it is the same issue described by the CFO.

The CFO confirmed this and said that it might appear as tenders but because it is international suppliers, it was not tenders, it was procurements that happened to be in excess of R500 000 because of foreign exchange fluctuations.

The Chairperson checked if there were members of the public present in the meeting; there were none. He checked if there are points that Committee Members and officials would like to note in closing.

AGSA confirmed that Wesgro is correct on the last question and answer and it looked forward to a continued relationship with the entities.

The Chairperson thanked DEDAT, its entities and AGSA.