Compensation Fund 2012/13 Annual Report & Turnaround Strategy: interrogation with Minister and Department of Labour & Compensation Fund

Public Accounts (SCOPA)

05 November 2013
Chairperson: Mr T Godi (APC)
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Meeting Summary

The Standing Committee on Public Accounts and the Portfolio Committee on Labour met with the Minister of Labour, the Director-General in her Department and the Compensation Fund to critically consider the Annual Report of the Compensation Fund as well as the Progress Report on the Fund’s Turnaround Strategy. The Fund was presently faced with diverse challenges and had received a disclaimer from the Auditor General of South Africa (AGSA). This finding had prompted the introduction of a Turnaround Strategy to transform the fortunes of the Fund. The Department had however stalled the implementation of the Turnaround Strategy and more particularly the Forensic Audit of the Fund owing to an ongoing investigation. Furthermore, there was no reason to continue to do the Forensic Audit as actions were not always taken on it.

The Fund had undertaken a diagnostic review of its operations and had identified key business challenges requiring immediate focus. Currently, there were too many initiatives leading to overloading parts of the organisation and business coordination and integration were ineffective. Other challenges included poor project and schedule integration, poor risks management due to insufficient oversight, poorly aligned definition and achievement of systems optimisation, misalignment with regards to performance management and accountability, low people engagement throughout the agency, turn-around fatigue, inadequate capacity in critical financial management areas, as well as negative audit outcomes. Also, AGSA’s findings indicated that there was no effective and efficient revenue management functions as required by the Public Finance Management Act, 1999 (PFMA) and the Fund did not take effective and appropriate steps to timeously collect all money due to it. Other findings by AGSA included the inability to determine completeness and accuracy of revenue assessment, incorrect assessment and billing of some employers, unreliable information such as missing bank details and lack of controls, incorrect calculations of penalties and interest, inability to collect long outstanding debts as well as current and uncorrected misstatements in the financials.

The Fund had however been working to counteract the identified challenges more particularly through a turnaround plan which had been developed and currently being finalised with management and the executives. Also, the Fund, in a bid to ensure management alignment, had undertaken a review of its governance structure and agreed and communicated individual accountability through programme management. The Fund was also planning, prioritising and scheduling initiatives and resources to align with its Strategic Intent. To ensure improved financial management, the Fund had developed a clear revenue management strategy, financial management policies, procedures and standards, while also ensuring that staffs were trained and skilled in the required areas. The Fund had also developed a Return of Earnings (ROE) website, was addressing AGSA’s findings including payroll audits. The Fund was also working on improving claims and beneficiary management by finalising the backlog program, reviewing and updating business processes, implementing the new Rand Mutual Assurance (RMA) system, integration between claims management systems and financial system and improving system controls. The Fund was initiating efforts and activities to develop a detailed implementation plan and drive rigorous execution of change management, while also promoting immediate feedback and acceptance.

Members expressed concern on the stalling of the Turnaround Strategy and sought clarification on when the investigation that would precede the full implementation of the turnaround plan would be completed. Members stated that the structure of the Fund was not working and the Fund had backlog of unprocessed application, noting that it was high time these were corrected. They expressed dissatisfaction with the problematic nature of the reporting line between the Department and the Fund. They however expressed optimism on the clarity in the Turnaround Strategy, noting that it would afford the Committees the opportunity to regularly monitor progress towards the achievement of the objectives in the Turnaround Strategy.

Meeting report

Opening Remarks

The Chairperson welcomed everyone present and remarked that the last meeting held relating to the Compensation Fund (CF or the Fund) was a follow up to the Committee’s engagement with the leadership of the Department of Labour (the Department) and the Fund at their headquarters in Tshwane which in itself was also a follow up to the hearing held earlier in the year to resolve the issues around the Fund and ensure its turnaround. The importance of the Fund to distressed and vulnerable workers could not be overstated and the challenges the Fund was encountering were creating problems for the distressed workers. The Committee was particularly concerned with issues relating to the finances of the Fund as reflected in the Auditor-General South Africa’s (AGSA) findings. In the last meeting, the Committee was of the opinion that there was a need for the Department, the Fund and every other entity involved to go back and reflect in order to ensure that a comprehensive report would be made available to the Parliament about the issues the Fund was confronted with, as well as what had been done or presently being done to resolve those issues. He asked the Minister of Labour to present the situation report of the Fund.

Remarks by Minister of Labour
Ms Mildred Oliphant, Minister of Labour thanked the Committee for the opportunity to present. She noted that during the last meeting with the Committee where the Director General (DG) of the Department of Labour made a presentation, the Committee had requested that the Minister, the DG as well as the Commissioner of the Fund meet at the departmental level in a bid to resolve some of the issues with the Fund. However, the meeting did not take place as she was busy with other domestic engagements and was also out of the country on an International Labour Organisation (ILO) engagement.

Minister Oliphant recalled that the presentation during the last meeting also highlighted some issues particularly relating to the forensic audit and the Turnaround Strategy that she had stalled. The decision she took on stalling the Turnaround Strategy and the Forensic Audit which the Fund was supposed to award the tenders for the specific programmes was taken based on her role as the executing authority responsible for oversight over the Director General and the Deputy Director Generals in terms of the implementation of the Department’s programmes. She would not be able to give the details on why the Turnaround Strategy was stalled particularly the tendering process, until the receipt of the report of the investigation she had ordered. There were reasons behind the decision to discontinue with the Forensic Audit, and some of the issues were discussed with the AGSA. A Forensic Audit was done by KPMG in 2007/8 for the Department and the Fund, and there were several recommendations including the need for a governance audit. The governance audit which was led by an internal audit was done in 2012/13, and this prompted the request for an opportunity to brief the Committee on the outcome of the governance audit. There was no reason to continue to do the forensic audit as actions were not always taken on it, and this was why she reported the way she did in the last meeting. She requested the Committee to allow the Commissioner and Chief Financial Officer (CFO) of the Fund to present the Turnaround Strategy in terms of the progress that had been achieved based on the recommendations of AGSA, while also considering the situation in previous years.

The Chairperson asked the Minister to take the Committee through the work done by the internal audit. He asked what the key findings, outcomes and recommendations were. He further asked what the response to the findings would look like.

Minister Oliphant replied that some of the issues would be part of the Fund’s presentation, whole some would not be part of it owing to the fact that they were currently under investigation.

The Chairperson asked the Fund to proceed with its presentation.

Briefing by Compensation Fund
Mr Shadrack Mkhonto, Commissioner, CF, stated that the presentation would provide a brief background on the Fund. It would also consider the challenges the Fund was confronted with, what was being presently done to tackle the challenges, what had been achieved as well as the next steps that the Fund was going to take. He reiterated that the Fund was faced with massive untenable challenges and could not maintain the status quo. This necessitated the Turnaround plan which would ensure that all key elements were addressed leading to a transformed Compensation Fund and improved service delivery of the Fund.

Mr Mkhonto stated that the Fund had undertaken a diagnostic review of its operations and had identified key business challenges requiring immediate focus. Currently, there were too many initiatives leading to overloading parts of the organisation and business coordination and integration were ineffective. Other challenges included poor project and schedule integration, poor risks management due to insufficient oversight, poorly aligned definition and achievement of systems optimisation, misalignment with regards to performance management and accountability, low people engagement throughout the agency, turn-around fatigue, inadequate capacity in critical financial management areas, as well as negative audit outcomes. In addition, the AGSA’s findings had indicated that there was no effective and efficient revenue management functions as required by the Public Finance Management Act, 1999 (PFMA) and the Fund did not take effective and appropriate steps to timeously collect all money due to it. Other findings by AGSA included the inability to determine completeness and accuracy of revenue assessment, incorrect assessment and billing of some employers, unreliable information such as missing bank details and lack of controls, incorrect calculations of penalties and interest, inability to collect long outstanding debts as well as current and uncorrected misstatements in the financials.

Mr Mkhonto however indicated that the Fund had been working to counteract the identified challenges. The Fund, in a bid to ensure management alignment, had undertaken a review of its governance structure and agreed and communicated individual accountability through programme management. The Fund was also planning, prioritising and scheduling initiatives and resources to align with its Strategic Intent. To ensure improved financial management, the Fund had developed a clear revenue management strategy, financial management policies, procedures and standards, while also ensuring that staffs were trained and skilled in the required areas. The Fund had also developed a Return of Earnings (ROE) website, was addressing AGSA’s findings including payroll audits. The Fund was also working on improving claims and beneficiary management by finalising the backlog program, reviewing and updating business processes, implementing the new Rand Mutual Assurance (RMA) system, integration between claims management systems and financial system and improving system controls. The Fund was initiating efforts and activities to develop a detailed implementation plan and drive rigorous execution of change management, while also promoting immediate feedback and acceptance.

Mr Mkhonto noted that a formalised governance and programme structure had been developed and approved in a bid to successfully drive the transformation programmes, and this entailed a comprehensive programme management structure. The structure comprised the Commissioner, CFO and Program Manager as top management. There were also four sub-divisional managements which were Corporate Management, Corporate Services, Financial Management and Operations Management. The rationales for the new structures were to improve decision making in the fund, ensure harmonisation and alignment of programmes and coordinated planning and implementation, promote shared understanding of Compensation Fund issues, challenges and priorities, ensure good governance and accountability through collective leadership and management of programmes, a platform to share information, communicate decisions, share best practices and experiences as well as to review performance, as well as to promote collegiality and cooperation within the management echelon and among staff.

Mr Mkhonto remarked that key initiatives had been identified in the different programmes to unlock value and drive the improvements and these initiatives had been planned in three phases. The first phase which was taking place in the current financial year included among others governance and leadership alignment, implementation of new organisational structure, filling of vacancies, action plan to resolve AGSA’s audit findings, revenue management strategy and decentralisation. The second phase scheduled for 2014/15 would consider legislation amendment, performance management system, customer relationship management strategy, payroll audits, information technology review and operating model as well as an online claims submission portal. Phase 3 scheduled for 2015/16 would see a focus on initiatives such as implementation of the Ecommerce system with auto assessment and its integration to the financial system, client relationship management, full implementation of RMA system and its integration to financial system, as well as rehabilitation programme in the amendment bill.

Mr Mkhonto also expounded on the progress the Fund had made in resolving some of the challenges it was confronted with. He stated that the turnaround plan had been developed and was currently being finalised with management and the executives. The Fund had started with the process of reviewing the Business Continuity Plan. The governance structures had been completed and signed off, while programme managers and responsibility managers had been appointed to promote accountability in terms of PFMA. The audit of all initiatives and progress was currently underway, finance policies and procedures were being established in line with PFMA and AGSA’s recommendations. Efforts had been geared towards filling the vacant new Director posts, as the Fund had also finished the interview process for filling the post of Chief Risk Officer. The ROE website had been completed and the operational and claims backlog programme was ongoing. Activities to initiate a revenue management strategy and a fraud hotline were however behind schedule.

Mr Mkhonto indicated that the next step the Fund would be taking revolved around the enhancement of the Turn-around plan and follow-up on approval by the Compensation Fund Board and Executive Authority, the communication and socialisation of the Turn-around plan, the linking of outputs to managers’ key performance indicators, the effective management of risk and consequences, as well as regular feedback on progress to oversight bodies.

Mr Johnny Modiba, Chief Financial Officer, CF, presented on the Fund’s efforts at counteracting the issues raised by AGSA. He noted that 37 findings led to the AGSA’s audit opinion and the Fund had developed a detailed operational plan to deal with the findings. The Fund had also elevated the significant ones to another high level action plan that would be presented at various oversight bodies. The AGSA had looked at three drivers of Internal Control – Leadership, Financial Performance Management and Governance. The audit focused more on the financial aspect, predetermined objectives as well as the compliance area. The only aspect under governance that AGSA was satisfied with is the internal audit. In terms of leadership, AGSA stressed the problem of inefficiency in the area of the Fund’s finance and accountability problems of the Fund’s managers. The response of the Fund to AGSA’s findings on leadership had led to the appointment of the CFO, programme managers and responsibility managers. The critical success factor under leadership was to ensure that there was harmony and a common vision at the management and executive level. Under oversight, the AGSA noted that there had been irregular expenditures and lack of internal control to oversee the irregular expenditure issues. The Fund had however started the process of initiating the internal control which would include the immediate reporting of any irregular expenditure noticed to the CFO. The Risk Management Committee had been established and other oversight bodies such as internal audit would be appointed to monitor progress in terms of risk management. To improve AGSA’s negative findings on predetermined objectives, a forum that would meet on a quarterly basis to look at how far targets the Fund wanted to achieve in its Annual Performance Plan (APP) had been achieved had been established. The Fund was also working to align itself and its Annual Performance Plan (APP) and Strategic Plans with the requirements of the technical office of the National Treasury.

Mr Modiba also highlighted the Fund’s approach in resolving the human resources issue under the leadership cluster, stating that the Fund would work towards filling all its vacancies and there would be a regular assessment on a quarterly basis, especially at the senior level to ensure that workers were working towards meeting targets. A plan to ensure that managers reported on a regular basis would incorporate a file management system. There would also be a monitoring and evaluation (M&E) framework in order to monitor progress towards objectives. There was now a detailed action plan which was initially done in order to focus on internal audit matter, but was now applicable and aligned with the AGSA’s recommendation and needs. The issues raised on expenditure under financial management would be easier to deal with within a reasonable time frame. Revenue was however posing problems relating to what AGSA required the Fund to do in terms of how to account for revenue. The Fund was engaging with the National Treasury to look at options in terms of accounting for revenue and had also briefed the AGSA in terms of measures that had been taken on the revenue side. To improve risk management, the Fund was looking at ensuring that regular assessments were done and was planning to procure necessary software or systems to help improve risk management. The fund had also established a committee under Compliance to make sure that risks are being monitored. In essence, the Fund’s response to AGSA’s findings entailed a detailed action plan which was a high level improvement plan to address the issues related to the Audit findings.

Discussion

The Chairperson alluded to the previous meeting held with the Fund, noting that the DG’s presentation focused on challenges rather than providing a progress report. There was a sense that the DG was operating in a grey area of having to deal with everything else apart from the Compensation Fund. He sought explanations from the Minister on why the Turnaround Strategy and Forensic Audit should be stalled or stopped. He asked if the decision the Minister was taking was temporal or permanent and how the decision conformed or related to the provisions in legislation. 

 

Ms Oliphant replied that a file had been given to the Committee and she believed the contents therein had been shared with Members. There was a specific letter written by the DG that the Minister had two options; either to negotiate with him for an exit package or to continue working as the DG on the condition that he would not work with the Compensation Commissioner. It was apposite to also stress that the law did not appropriate the power to negotiate such packages to the Minister of Labour but the Minister for Public Services and Administration. Hence, she would not be in a position to discuss the matter as she was not responsible for such negotiations.

The Chairperson replied that the file was received but the contents were not shared with members.

Mr D George (DA) made reference to the reporting line, stating that it was problematic. He noted that the issue of the reporting line was raised during the last meeting was rescheduled for the present meeting. The expectation was that sometime between the previous meeting and now, the Department would have worked on giving the Committee some clarity on the reporting line. The fact that the structure of Fund was not ineffective could not be overstated. The Fund was not working as it had got a disclaimer. Legislation was clear on what the reporting line should be which ought not to be changed. It was inappropriate to be outside the law and the Committee could not condone the forging of the lines. The understanding from all that had been said was that there was a forensic matter being currently investigated and the Minister had said she would not be able to provide answers to some questions until the investigation had been concluded. The Minister had however intervened in a very significant way. The Committee needed an indication of the time the investigation would be concluded and when the Minister would be reporting back to the Committee as incessant postponement of these issues was not ideal. It was also not good enough that Members did not see the documents that the Minister had sent to the Committee.

Minister Oliphant replied that she did not give any file to the Committee but the DG had. The same file was also sent to some other four entities including the Public Prosecutor. She would not be able to give an indication of when the investigation would be completed as she had handed over the process to the Justice Clusters to conduct the investigation because the Department did not have certain powers.

Mr George alluded to the backlog of unprocessed claims the Committee saw during its visit to the Fund’s office in Pretoria, and asked about the progress the Department and the Fund had made in clearing the backlog of compensation application.

Ms Kefilwe Tselane, Acting Chief Director: Operations, CF, replied that 325 000 benefits were paid to employees to the value of R1 billion in the current financial year, which was an increase from the amount paid in previous years. The medical payments also recorded an increase compared to previous years.

Mr George responded that his question had been misunderstood. He clarified that Members saw stacks of boxes with unprocessed claims in the Fund’s office in Pretoria, and asked if there was a team presently going through the boxes processing the applications in a bid to clear the backlog.

Ms Tselane replied that the piles of unprocessed applications were no more there. Although there were still backlogs, those particular ones had been cleared. The Fund now received applications online and people without internet access submitted their applications to the various labour centres in the country.

Ms G Saal (ANC) sought clarification on the time frame the Fund was looking at for the achievement of the different objectives in the Turnaround Strategy. She asked the fund to elucidate on what it had been doing in terms of claims processing and payment as this was its primary duty. She noted that in terms of revenue collection, there was no clear indication of the mandate of the two service providers and it did not relate well with appropriate legislation.

Mr Mkhonto replied that the Fund was working on amending the legislation applicable to it and this was the initiative the Board was given on the request of the Minister. The amendment was being finalised and the Treasury was being consulted. The key areas of amendment related to governance, rehabilitation as well as beneficiary and dispute resolution. The Fund was using only one service provider to assist with revenue collection as the other part of the collection was being done by the Fund’s officials. When he was the Deputy Director General, he had requested the Fund to conduct a study to find the best claims management solution for the Fund. It was recommended that the Rand Mutual Assurance (RMA) system was the best fit for the Fund. The Minister allowed the Fund to procure RMA when he became the Commissioner at the end of 2007. However, the then Deputy Director General, after returning from s trip to Germany, stopped the launch of the RMA system and favoured the implementation of the SAP system which had not been effective since its utilisation. The Fund had recently requested the Minister to allow it implement the RMA. The Minister had given her consent and the Fund was in the process of implementing the RMA. It was also unfortunate that the Fund did not have its own information technology (IT) system, but was relying on the Department’s IT system. The Fund had been clamouring for support on this and had approached the South Africa State Information Technology Agency (SITA) for assistance. It was indeed true that the reporting lines were posing problems. He had, for instance, advertised a tender in August before he took an unplanned break from work for the appointment of a Transaction Adviser to look at what Siemens was providing for the Fund which was not working and initiate a process of getting the money back from Siemens. However, the current DG, acting as the Commissioner in his absence, did away with the process of appointing the Transaction Adviser.

Ms Saal responded that the time frame for achievement of objectives in terms of the Turnaround Strategy had not been clarified. She asked how much the Fund had lost to the service provider that could not do the assignment awarded to it.

Mr Mkhonto replied that the objectives of the Turnaround Strategy had been subdivided into three phases as emphasised in the presentation and the final phase would end by March 2016. Siemens was getting more than R10 million relating to the SAP system and the Fund wanted to get a Transaction Adviser to help out with how the Fund could get the money back.

Ms M Mangena (ANC) referred to the problem of paying claims especially to people without a bank account, stating that the Department should be able to take the initiative and go to the rural areas to locate claimants.

The Chairperson noted a major concern relating to the Fund was the regression in its Annual Report as compared to previous years. The Fund had not started work also on the key drivers of internal control which were germane to improving its fortunes. It was important that the Committee received a sense of assurance that the Turnaround Strategy was not merely a conceptualisation of issues and that the Fund would be able to respond in line with the urgency the issues required. He asked the DG what progress the Department had made in relation to the work granted to EOH Holdings as the Fund relied on the Department for the funding.

Mr Nkosinathi Nhleko, DG, Department of Labour, stated that he had actually sent the file to the Committee and there were five entities that had access to the file including the Minister and the Prosecutor. The issue of the reporting lines needed to be clarified. Even as the Commissioner had alluded to the problematic nature of the reporting line, direct reporting did not necessarily translate to agreement. He had called two senior management officials of the Fund and asked them why a Transaction Adviser was needed to advise on the problems that were already known and they could not advance credible reasons on the need for the Transaction Adviser. The fact that the need for a Transaction Adviser was not sanctioned did not mean there was a problem with the reporting line as reporting line did not mean agreement. There was an ongoing engagement in terms of IT with the IT service providers. Tendering was about to be done in relation to SITA but there were emergent issues that necessitated the change of approach. The Fund was not going to collapse post-November as back-up mechanisms were currently being put in place. One of the proposals related to the people pushing for the extension of the EOH contract that would not happen. Perhaps the Department and the Fund could come back later to be able to give a fuller update on the contract that was terminating at the end of November as well as on the IT issue and the progress made on it.

The Chairperson stated that the copies of the documents sent by the DG would be made available to Members.  

Mr M Nchabeleng (ANC), Chairperson of the Portfolio Committee on Labour, remarked that the Portfolio Committee would also need copies of the documents in order to relate with what was in those documents. He noted that the road ahead for the Fund was becoming clearer from recent engagements with the Department and the Fund. There were now yardsticks that could be used to measure the Fund’s progress and how it was performing in terms of its Turnaround Strategy.

Minister Oliphant appealed to the Committees to give the Department an opportunity to implement the proposed Turnaround Strategy, as well as opportunities to present quarterly progress reports on the implementation of the Turnaround Strategy.

The Chairperson responded that the opportunities would be given to the Department and the Fund. It would be good to check on progress from time to time. Although the engagement did not really consider the Annual Report in-depth, it had focused on how to make progress going forward and this would be beneficial in the long run.

The Chairperson thanked everyone present in the meeting. The meeting was adjourned.

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