Department of Public Works on plan to address ESKOM debt, with Minister

Meeting report

The Chairperson welcomed Minister De Lille and the Department of Public Works and Infrastructure (DPWI) representatives. He said that one of the biggest concerns the Committee had about DPWI was it had registered the highest debt owed to Eskom. Since the debt has continued to escalate despite the institution of an Inter-Ministerial Task Team (IMTT), it was important that the Committee gains an understanding at this meeting of how the debt will be paid. He handed over to the Minister.

Background
Minister Patricia  De Lille said that the Department does have a project to address the debt owed to municipalities and other service providers. She noted that it has been reported that DPWI owes Eskom R3 billion in municipal debt, she replied that this claim was false. She explained that in the current system DPWI is responsible for paying municipal rates and services and paying Eskom accounts on behalf of national government departments. After paying on behalf of government departments, the departments have to reimburse DPWI for these payments.

Minister De Lille said that national departments owe DPWI over R3.4 billion for municipal services as of the 31 December 2019.

Government Debt Project Plan
The Minister said that in August 2019, as a part of the Sixth Administration, DPWI started the campaign of settling all outstanding national government debt which was owed to municipalities and to Eskom. The campaign was led by the CFO of DPWI and it was a proactive measure to resolve all outstanding debt as well as to ensure that there was no repeat of unpaid municipal accounts by departments.

The Minister said that under the Sixth Administration, DPWI had also introduced consequence management which led to almost ten officials being disciplined for not paying municipal accounts within 30 days.

As of 30 June 2019 municipalities reported in terms of Section 71 of the Municipal Finance Management Act that the overall government debt owed by DPWI was over R3 billion. She noted that 135 out of 257 municipalities provided Section 71 reports while the remaining 122 municipalities did not report as per statutory requirements.

The campaign launched in August 2019 and DPWI focused on verification and reconciliation of outstanding debt. DPWI had also in July 2019 settled all 2 084 payments of service providers outstanding for over 30 days. Within a single month in settling that outstanding debt DPWI had injected over R1 billion into the economy. The DPWI campaign is monitored by the CFO on a weekly basis and there are also monthly meetings held with National Treasury where information is shared. It was found that the initial report by municipalities of DPWI’s R3 billion debt was unreliable and incorrect as displayed in Section 71 MMFA information. She noted three examples where municipalities had reported highly inflated debt by DPWI but where it was found after verification that the amount was far less than reported and the municipalities were unable to provide supporting documents for the amount.

The Minister said that in October 2019, the DPWI sent out letters to all 257 municipalities to inform them about DPWI’s project on debt and to solicit their cooperation. DPWI has ongoing working sessions with the municipalities looking at every account, ensuring that it has been reconciled and verified and that the parties involved have agreed on timelines for the settlement of invoices.

Progress Update
Minister De Lille said that as of 4 February 2020, DPWI has verified and resolved 63% of the reported R3 billion rand and the actual amount has come to R1.97 billion. After the verification engagements with municipalities it was discovered that there was a difference of more than R1.7 billion compared to the amount that municipalities had stated in their Section 71 reports. What this meant was that the actual amount DPWI owed to municipalities was R186 million and not the R1.9 billion reported.

The Minister said that as part of DPWI’s Government Debt campaign, it still has to engage another 142 municipalities with a reported outstanding amount of approximately R388 million. DPWI hopes to complete its debt campaign before the beginning the new financial year or soon after it begins.

The Minister assured the Committee that DPWI is committed to settling all outstanding debt once it has been verified and reconciled and ensuring that all verified invoices are paid within 30 days of receipt.

Expenditure to Date
The Minister highlighted that despite the debt owed to DPWI by government departments, DPWI has continued to pay all municipal accounts and Eskom accounts on behalf of national government departments. To do this, DPWI has to incur a massive overdraft which the Auditor General has raised concerns about. DPWI wants to stop using the overdraft facility for settling municipal accounts.

The Minister informed the Committee that DPWI has taken the decision, due to the challenges that DPWI has been experiencing, that government departments pay their debt directly to municipalities and Eskom. DPWI has already notified government departments that this new process will take effect from 1 April 2020. The government departments must take responsibility for direct payment rather than DPWI.

Mr Mandla Sithole, DPWI CFO, clarified that it is not DPWI which owes Eskom R3 billion but rather certain municipalities who have not paid Eskom although DPWI has serviced its debts to the municipalities. The only debt DPWI owes Eskom is approximately R4.9 million and it is where Eskom is the direct supplier of electricity.

The framework which DPWI had been using since 2006 to service the municipal debt of government departments has not being working in DPWI’s favour as departments have failed to pay DPWI on time which has resulted in a huge bank overdraft for DPWI.

Mr Sithole referred to slide 12 and said that for the current financial year DPWI has paid a total of R2.7 billion for municipal services to municipalities and Eskom and R624 million for property rates which amounted to a grand total of R3.3 billion.

The previous Section 71 reports were outdated and DPWI still has to receive updated reports of what is owed to municipalities. The approach that DPWI had taken when paying off its debts was to start with the biggest amounts. Since some municipalities do not function with the same amount of organisation, DPWI has had to take the initiative to find missing invoices from some municipalities.

Eskom
The Minister said that on the 5 December 2019, DPWI held a meeting with Eskom to address all issues of common interest. During that meeting Eskom had not raised any issues of long outstanding debt, nor at a second meeting on 21 January 2020. Eskom had commended DPWI on its timeous payments and good working relationship.

The Minister said that the arrears for all unpaid Eskom invoices within DPWI’s possession totalled R4.9 million. She assured the Committee that DPWI has been working on this daily to ensure that DPWI settles its debt on time.

Challenges
The Minister said that there was a list of 122 municipalities which are not or inaccurately or incompletely reporting in terms of Section 71 of the MFMA. She suggested the Committee finds out from National Treasury what it has done about these municipalities. Other challenges include non-cooperating municipalities during the verification process of municipal accounts; opening balances on municipal accounts that cannot be substantiated by municipalities; municipalities failing to note payments by DPWI.

Discussion
Mr Lees (DA) asked why the massive bank overdraft has been allowed to happen. Who will be held accountable for not adhering to the law? He asked that the DG disclose the amount of the overdraft.

Minister De Lille replied that as consequence management, DPWI has added a KPI in the performance agreement of all key officials that officials will do everything within their power to get an unqualified to a clean audit. On the bank overdraft, the Minister explained that it was when the Auditor General had raised concerns about the overdraft, DPWI decided to let government departments handle payments for their own services to avoid DPWI getting an qualified audit. DPWI will be meeting with the AG in the month of February to find a solution to DPWI’s overdraft problem.

The DG replied that the overdraft amount fluctuates. DPWI has allowed other departments to take over the responsibility of servicing their own debts. DPWI has taken the decision that when a line department fails to pay DPWI, DPWI will not pay on behalf of that department.

The CFO replied that when DPWI started the Property Management and Trading Entity (PMTE) in 2007, the bank overdraft was R851 million and as of 31 December 2019, the bank overdraft was R2.6 billion. The framework which DPWI had been using to pay off debts on behalf of other government departments had created the bank overdraft.

Mr Lees asked which accounting officer would be held accountable for the overdraft. He asked who are the officials who had been disciplined.

DPWI Director General, Adv Sam Vukela, responded to the question on consequence management. He replied that it was the client departments that had to pay DPWI. Hence DPWI had taken the decision to get departments to service their own debts. DPWI has made the decision not to make payment on behalf departments who have failed to pay DPWI. The DG replied that ultimately he was the one to blame for authorising payments on behalf of client departments who had not paid DPWI.

The Chairperson told the DG that the decision that DPWI has taken to address the overdraft is noble but cautioned against weighing and categorising consequences. He told the DG that anything that is outside of compliance unacceptable. 

Mr Lees asked the DPWI how the overdraft was secured and which bank it has been using.

The DG explained that the bank overdraft is not with a commercial bank and therefore it does not accumulate any interest. He told the Members that it was with a Paymaster-General (PMG) account.

Mr Hadebe (ANC) referred to the 3 December 2019 meeting which the Committee held on the Inter-Ministerial Task Team findings about Eskom debt where the biggest offenders were said to be DPWI. He asked DPWI to confirm that what they have presented to the Committee is the truth.

The Chairperson pointed out that in trying to get to the bottom of the Eskom debt issue, it is apparent that there are many contradictions in what the different parties involved have been reporting. He advised Members not yet to accept any narratives about the Eskom debt as gospel truth until the Committee is able to meet with all parties involved to get to the bottom of the issue. He added that at the heart of the matter is the collapse of the IMTT which has not been able to sort out the issue and ensure there was accountability.

Minister De Lille said that she welcomes the suggestion of having all stakeholders in one room to ensure that everyone accounts to Parliament. What DPWI has tried to demonstrate in the meeting was that incorrect and inflated figures were put into the Section 71 report. DPWI has been able to confirm that these figures were incorrect because DPWI has been able to sign acknowledgment agreements with municipalities where municipalities have acknowledged there have been great discrepancies in the debt figures reported.

Mr Hadebe asked why DPWI had only decided to act after the release of the Section 71 report in June while DPWI was being billed monthly. Why did you not embark on that exercise on a month-to-month basis before this escalated? This brings into question the credibility and accuracy of the credit control of all these municipalities. He asked if the proposal to let government departments pay their own debts is going to be sustainable and if it will bring positive results.

Director General Vukela replied that based on a cost-benefit analysis and the legal requirements the decision to let departments pay their own debt was the best decision. However, DPWI does not guarantee that it will go down very well with the departments. On the question why the bill had been allowed to escalate so high, there have been engagements for a while to establish what will be done to ensure that DPWI gets verified bills from municipalities so that all payments DPWI makes can be accounted for.

The CFO noted that DPWI did not start the payments process only after the Section 71 report. DPWI has been paying municipalities on a monthly basis.

Mr Hadebe asked if the verified debt paid in August 2019 was not long-outstanding debts with those municipalities which had been submitted in their Section 71 reports.

The CFO referred to slide 8 and said that the total amount reported in the Section 71 reports was R1.9 billion. Through the verification process it was established that the actual amount owed by DPWI was R188 million. He added that DPWI was paying all current invoices.

The Chairperson asked if over the past 12 years DPWI had paid unverified accounts.

Mr Sithole replied that the rule is very clear that DPWI needs to certify, before paying, that services have been rendered.

The Chairperson asked when the process of verification of invoices began. What was the trigger?

Mr Sithole replied that in previous years DPWI has always verified its payments. However, in the context of debt, the DPWI may not have reconciled opening balances.

Mr Hadebe noted the presentation stated the Government Debt project commenced on 1 August 2019 and its anticipated end date is 30 June 2020.

The Chairperson was interested in the process that was used prior to the current verification process.

Ms B Swarts (ANC) asked the Minister to explain what administration has been put into place to oversee the handing over of the accounts to government departments. The 1 April is in a few weeks. She asked how DPWI will ensure that user departments will repay DPWI for the payment of municipal services which DPWI has already rendered to service that overdraft. How are you binding them to still service that overdraft debt - if they have failed to respond to the letters you have sent them?

Director General Vukela replied that DPWI has written to all the directors general to make them aware of the situation.

The CFO explained that the process of handing over accounts to government departments included the writing of letters to departments and engaging departments. On assurance of payment by departments of Eskom that would be something beyond the control of DPWI. It is the responsibility of the accounting officer to ensure that the department settles all invoices. Moving to the amounts that departments owe DPWI, the letters that DPWI sent out, had indicated that. The CFO spoke about the fact that DPWI would be required to give permission to a tenant department to open a municipal account - this would not happen if it has not engaged DPWI on what its payment terms would be [audio unclear 1:05].

The Chairperson asked the CFO to clarify, in the event that departments do not acknowledge their debt to DPWI, if DPWI would continue to pay on their behalf.

The DPWI CFO answered that that would not be the case.

Minister De Lille pointed out that what had triggered the process of reconciliation was the Seven Key Priorities of the Sixth Administration as well as the SONA speech where the President had appealed to all government departments to ensure that they pay invoices within 30 days. As the new Minister she had looked at Chapter 7 of the Public Finance Management Act (PFMA) and section 63(1)(a) and (b) which had helped DPWI to set a new goal to achieve an unqualified to clean audit and change DPWI KPIs in an effort to make government clean and transparent again.

Ms Swarts asked how DPWI conducted the reconciliation process at Mfuleni if there were no supporting documents.

Director General Vukela replied that DPWI goes all out during the recovery process. Where a municipality cannot provide supporting documents, unfortunately there is nothing that DPWI can do. DPWI has the responsibility to pay invoices based on amounts that can be verified.

Ms Swarts suggested that the CFO does not seem to be telling the whole truth. She pointed out that certain municipalities were owed money but at the same time the CFO is claiming that there are no supporting documents to support the claim. As the custodian of the money, the CFO has to be transparent and honest. She asked the Chairperson to bring all the different parties under one roof to get to the bottom of the matter.

Ms Swarts asked the CFO how long he has been at DPWI. She raised concern about the contradictions the CFO had made earlier when asked if DPWI had always verified previous invoices whilst the Minister said that the Government Debt plan was launched under the Sixth Administration. 

The Chairperson agreed that he was still not clear on DPWI’s verification process prior to the Sixth Parliament. He still has doubts and reservations on the matter.

The CFO replied that he has been at DPWI since 2005 and he came into his current position in 2013. He referred to Mr Mohwasa to comment on the debt verification process prior to the Sixth Administration. When DPWI engages with municipalities and there is no document for verification, the CFO has a responsibility to ensure that he pays according to an available invoice because failing to do so goes against the PFMA and becomes an audit concern.

Mr Molatelo Mohwasa, Acting Deputy Director General: Inter-Governmental Coordination, replied about the verification process prior to the Sixth Administration. He confirmed that there had been a process in place before and such a process gave effect to some of the reports coming from the COGTA debt report given in December. In 2015 DPWI had faced a similar situation where DPWI had received invoices from municipalities and when the Section 71 report was released there were huge discrepancies between the two.

The Chairperson asked DPWI again if they had paid unverified accounts previously and if so what are the recovery amounts.

Mr Mohwasa replied that DPWI does not pay without verifying invoices but since DPWI is a big department it may have happened that invoices were paid without verification, which is something that is not allowed.

Mr Hadebe asked the CFO if there had been an instance where DPWI has recovered money that was overpaid for municipal services.

The CFO replied that there had not been such an instance.

The Chairperson told DPWI that it appears that DPWI has not undertaken an exercise, given the seriousness of the problem, to prevent losses even though this is not the first time DPWI is experience this problem. The Chairperson implored DPWI to take the time to investigate these cases to be able to give departments the necessary advice in the transfer of accounts.

The Minister committed herself to going back to conduct investigations and attempt to recover any losses to DPWI due to overpayment of invoices. In conducting these investigations, she asked the Committee how far back they wanted her to go.

The Chairperson welcomed the Minister’s commitment and told the Minister that the Committee will discuss how far they want investigations to go and will let DPWI know.

Mr S Somyo (ANC) said the problem which DPWI is facing is a huge one and if they continue in this vein the bank overdraft will get to a point where Public Works cannot handle it. Also it is important to look at the types of communities where services are lacking. It is inevitable that members of those communities will piggyback on the infrastructure of DPWI and this could contribute to the financial loss DPWI is currently experiencing.

Mr Somyo said that DPWI needed to have an instrument which advises DPWI, as the custodians of government property, on how to deal with sustenance of property. One such example is being able to ensure that they receive municipal services and pay for them.

Mr Somyo asked the Minister why DPWI does not fight to ensure that everything government has placed under the control of DPWI, DPWI becomes responsible for it.

The Minster replied that DPWI is one of the departments which does not have an Act of Parliament which governs how the department is supposed to run. She explained that DPWI was inherited from the old apartheid system and it was not reformed in anyway. DPWI is currently in the process of coming up with a Bill which dictates its exact legal mandate. DPWI will be compiling a report to the Portfolio Committee detailing the process of the Bill.

The Minister referred to the Government Immovable Assets Management Act (GIAMA) which has to be read together with the PFMA since there are contractual obligations involved. There is a contractual obligation between DPWI and its user departments where user departments pay DPWI a 5% administration fee for services rendered. DPWI has decided that the 5% administration fee cannot be at the expense of clean and transparent government. Ensuring accountability amongst government departments is more important. They will drop the 5% administration fee

Minister De Lille said that DPWI has introduced both consequence management as well as contract management with user departments as it has realised that user departments have not been honouring the contracts. Within these contracts, one of DPWI's outlined responsibilities is the management and maintenance of facilities. However, she noted that what foreseen in terms of GIAMA is the ownership of government property. DPWI does not know how many buildings or plots of land government owns. This was due to the lack of a proper Immovable Assets Register (IAR).

The Minister said that DPWI has engaged with National Treasury to be able to use their master plan tender and piggyback on that tender to use this master tender made available by National Treasury to develop a proper Immovable Assets Register. The departments must take responsibility for paying their own municipal services which are covered in their budget.

The Chairperson told the Minister that during the Fifth Parliament, SCOPA was informed that the Immovable Asset Register had been completed.

The Minister clarified that about six years ago, DPWI got a system called ARCHIBUS which required that DPWI implements all the modules of the system before gaining access to a fully documented Immovable Assets Register. DPWI still has nine outstanding ARCHIBUS modules before they are able to get to a fully fledged Immovable Assets Register. She offered that DPWI could present the Committee with a progress update.

The Chairperson agreed that this was needed as it was the first time hearing about this.

Mr Somyo asked the Minister to agree that DPWI has a problem.

The Minister agreed with Mr Somyo that DPWI does indeed have a big problem.

Ms B van Minnen (DA) directed her questions at National Treasury. She asked what was happening in the 122 municipalities which are not reporting in terms of Section 71. What is the process being used for these municipalities? She asked what DPWI was doing in instances where DPWI payments were being made to municipalities for municipal services but municipalities were not paying Eskom.

The National Treasury representative replied that the Section 71 monthly report process requires that ten working days after month end the municipality has to provide a report to National Treasury. The reports have to be signed off by the accounting officer of the municipalities as credible. Treasury consolidates the reports received from municipalities and these reports then become public reports and are provided to national government as reports on progress on that debt.

The report given to SCOPA at its 3 December 2019 meeting reflected what had been handed into Treasury for the period ending 30 June 2019 by municipalities. The amount of R3 billion said to be owed by DPWI is what was consolidated from the reports given to National Treasury by municipalities. A detailed breakdown of the amounts in terms of municipal services and property rates was available as well as an age analysis of the amounts.

Municipalities have moved away from having tenant accounts and instead have consolidated accounts with the owner of the property. Treasury has advised municipalities to negotiate with departments which are owing them money. This is where the problematic breakdown comes in as DPWI is only responsible for the property rates as owner but not for the municipal services of the tenant department.

On the Eskom account, there is a big difference between what departments and municipalities owe. If you look at the top 20 municipal debtors, there is very little correlation between what those municipalities owe Eskom and what departments owe those municipalities.

Ms van Minnen explained that her question was specific to the 122 municipalities which had not reported in terms of Section 71. What type of mechanism was being used for these municipalities?

The National Treasury representative apologised for the confusion and clarified that what Treasury is saying is that municipalities have reported in terms of Section 71; they just had not indicated what government departments owe them.

Ms van Minnen pointed out that the DPWI presentation clearly states that 122 municipalities had not reported in terms of Section 71.

The Chairperson asked the Director General to clear up the confusion.

Director General Vukela replied that what DPWI is saying is not that the 122 municipalities have not reported but that they have not reported in the Section 71 report on what particular departments are owing them.

The Chairperson said a broader meeting was needed to clarify these owed amounts.

Mr Hadebe asked for clarity on whether or not DPWI was going to be involved in the process of handing over of accounts to departments. He expressed the view that this was an attempt to try and outsource a problem which DPWI could not solve as the asset owner due to user departments not paying.

The DG explained that by handing over the accounts to user departments, DPWI is not outsourcing the problem; instead they are trying to place the responsibility where it belongs.

The Chairperson suggested that DPWI presents the Committee with a concept document and a brief on how they are planning to handle the transition process. There is also a need for all parties to meet as the Committee cannot take anything yet as the gospel truth.

Mr Lees suggested that the Auditor-General be included in the stakeholder meeting due to the fact that there are discrepancies. He also raised the concern that if Public Works does achieve the change it will have huge implications for the letting market because other property owners will also say that tenants are the ones to be held accountable.

Mr Lees asked whether there is enough money to clear the R2.6 billion overdraft.

The DG replied that the R2.6 billion overdraft amount fluctuates and it is not only the result of payments for municipal accounts but it is also caused by lease agreements that that are not paid by client departments.

The CFO added that DPWI is responsible for processing invoices for leases where DPWI leases buildings from the private sector and pays on behalf of departments and the debt then becomes a recovery cost owed by departments. In addition, departments have funding for infrastructure and DPWI usually does the construction on a recovery-cost basis. And there are also the municipal services which DPWI pays on behalf of the departments; hence the huge overdraft.  

The Chairperson told the DPWI that the information raises a totally different aspect since DPWI is not supposed to be operating on an overdraft to begin with. He expressed his shock at DPWI’s non-compliance. It is also going to be necessary for the Committee to have a follow-up meeting to monitor progress made on the issues raised in the current meeting.

The Minister raised her concern about where the money that Treasury approves in the budgets of government departments to service their debt was going if it is not being paid to DPWI.

Ms Swarts raised a concern that if there was no Immovable Assets Register, a problem could arise where someone else could be collecting rent using DPWI properties. She asked DPWI to provide a timeframe to get the Immovable Assets Register up and running. She asked that at its next meeting DPWI tells the Committee how much of the 5% service fee they actually collect in reality from their user departments. She suggested that DPWI puts measures in place to ensure that they receive from user departments everything that is due to them.

The Minister said that she accepts accountability where it is necessary but she also noted that DPWI is treated like a glorified domestic worker where it is expected to do all the hard work for departments despite Parliament approving the budgets of these departments for such projects. Another issue DPWI struggles with is that it has a number of entities reporting to it and most of these entities have not received a clean audit.

The Minister said that the Immovable Assets Register is not yet completed and that is why DPWI sought the help of National Treasury to get the master tender which will assist DPWI in bringing professional help on board to complete the Immovable Assets Register.

The Chairperson replied that due to the discrepancy which has befallen it, the problems of the Committee are compounded. There are many issues which need to be resolved around Eskom’s debt. However, the fundamental challenge is that Eskom is in crisis and it needs to be paid. The Chairperson warned that the risks involved with an Eskom which is not functioning efficiently and effectively are astronomical. The Committee needed to inculcate a culture of payment where Eskom is not afraid to disconnect government and citizens who do not honour their duty to the entity.

The meeting was adjourned.