Departments of Health and Public Enterprises and South African Airways 2006/07 Qualified Audits: hearings

STANDING COMMITTEE ON PUBLIC ACCOUNTS (SCOPA)
14 November 2007
DEPARTMENTS OF HEALTH AND PUBLIC ENTERPRISES AND SOUTH AFRICAN AIRWAYS 2006/07 QUALIFIED AUDITS: HEARINGS

Chairperson: Mr T Godi (APC)

Documents handed out:
Department of Health Audit Report 2006/07
Department of Public Enterprises Annual Report presentation
Department of Public Enterprises Audit Report 2006/07
South African Airways Audit Report 2006/07

Audio recording of meeting [Part 1][Part 2]

SUMMARY
The Department of Health faced a big challenge in respect of the non-compliance of its provincial department to submit business plans for grants and monthly and quarterly reports timeously. They also face challenges in monitoring and supervision of the expenditure of the provinces. The Department had to put a monitoring mechanism in place because there must be monitoring. It was decided that the next time the Committee met with the Department, the provincial heads had also to be present. There was concern that there had been under-spending in the HIV cluster. The DG explained that this was in the area of prevention.

The Department of Public Enterprises received compliments from the Committee on their sterling audit report. The Chairperson described them as an example to other Departments.

SAA is going through a restructuring process. Some of their subsidiaries have to be fully capitalised and put onto the market. They believe that when this is accomplished they will no longer have the problem of most of their subsidiaries being technically insolvent.

Also, regarding their financial risk management, there are stringent procedures in place to prevent the reoccurrence of risk which they experienced in the past. They stick to these procedures rigorously even though they could be cumbersome

MINUTES
Department of Health (DOH): Interrogation of Audit Report 2006/07
The DOH delegation included the Director General (DG), Mr Thami Mseleku, the Chief Financial Officer (CFO), Mr Gerrit Muller, and Financial Director, Mr A Venter.

Mr Trent (DA) commented that while it was good that control frameworks were now in place there were still issues of non-compliance which troubled him. These were old matters which had already been raised three years in a row. The only change he could see was that there was now a framework in place. The late submission of business plans from provinces in respect of grants was a problem and he asked what the Department had done about this.

The DG replied that this was indeed an ongoing matter and it was difficult for them to get the provinces to comply. They had withheld grant transfers where possible to ensure that business plans were submitted. The Department could only appeal and appeal and appeal, and where possible, withhold transfers. It remained a problem in spite of the Department’s attempts to get it done earlier. The issue for them was ongoing and they could only do so much. They had control mechanisms in respect of compliance but if those mechanisms had no effect, then the Department could not go beyond that. He acknowledged that the attitude of provinces toward submission of business plans was still a problem.

Mr Trent referred to the late submission of monthly and quarterly reports and the lack of adequate capacity to go out to the provinces about this. He asked what the Department had done to address this particular capacity problem.

The DG said that there was a Unit which visited provinces and spent two days with each province. This meant that they spend a total of 22 days visiting all the provinces. They were always asking themselves what type of capacity they needed that would monitor the conditional grants. They had been grappling with this issue of capacity to monitor.

The Chairperson asked if the quarterly report dealt with each specific program or with the composite of programmes.

The DG replied that the reports were quarterly reports on separate grants.

The Chairperson noted that their report stated that the submission rate had improved and that two officials focused on provinces submitting data timeously. The question before them was whether these were sufficient to obtain this objective. He suggested that they approach the issue of capacity from that angle.

The DG replied that the Chairperson’s reference related to broader monitoring, evaluation, and non-financial data. There were certain aspects of conditional grants which would relate to that. However, for data collection and the timeous submission thereof, one did not need more than three or four people.

The Chairperson added that one must also ensure the quality of the data.

The DG said that business plans were not just data. One needed people to go into the field to verify the data to determine if there was appropriateness of expenditure. He added that one could not do this for conditional grants only. He did not think that it was feasible to build capacity within the provinces just for that purpose. It would be better just to go to the provinces to check on that.

Mr Trent asked why the Department had conditional grants if they could not monitor them. For example, if the Department allocated funds for AIDS, the province could not be allowed to use that money for a different purpose.

He then referred to the Audit Report which stated that in certain instances, the grant exceeded the business plan. This happened because the Department did not monitor properly and that there must be financial discipline. He asked what the Department did with the provinces when they discovered that there had been over-expenditure.

The DG explained that in this particular incident referred to by Mr Trent, there had in fact been no over-expenditure. What had happened was that they had received more money than expected at the time the business plan was approved. The adjustment meant that more money was given after the Division of Revenue Act (DORA). They tell the provinces to draft a business plan in the context of the stated amount. If more money becomes available, then the provinces must redo the business plan – that was what the Auditor General told the Department. They assumed that the provinces would make this adjustment but they did not. It was the national Department’s mistake, as they should not have made that assumption.

Mr Trent told the DG that there were significant inconsistencies in the information supplied – between what the provinces were saying and what the Department knew. If the Department felt that this could not be done, they should tell the Committee because the Committee would not want to insist that something be implemented if it was impractical.
 
The Chairperson said that it was a management function and that there had to be a tightening up from the DOH’s side. This challenge was there even in the previous financial year. It talked to the issue of compliance and monitoring. They needed to meet with the Department again but next time the provincial heads should also be present. They needed to know why there were delays, and why the reports were not comprehensive.

He went on to say that whatever capacity the Department developed and put in place, its effectiveness and impact must also deal with conditional grants. The Department did not have to put in place a specific capacity to monitor only conditional grants. If they were to put in place a general unit that dealt with everything – that was up to the Department to decide as it was a technical issue – but there must be monitoring.

Mr Trent referred to that part of the report which said that the Department was trying to monitor health services generally. He asked what the cost would be of a proper monitoring system and he said that the Department must evaluate the cost thereof. This would lead to health services improving. He added that of course one did not want to spend one rand to disburse two rand, but the cost must be evaluated.

The Chairperson intervened to say that they should flag the issue of grants to provinces until the provinces were also present.

Mr Trent said that he wanted an explanation for that part of the their report which stated that money had accidentally been transferred to a non-government organisation (NGO).

The DG explained that a transfer had been made to Lovelife when the business plan had already expired. The DG said that in future, they must be able to pick up that the business plan had in fact expired and ensure that the business plan had been updated. The Department had to tighten their controls to ensure this.

Mr Trent asked the DG to give the Committee an assurance that the Department would in fact tighten their control.

The Chairperson said that it all boiled down to the human factor and the question of leadership.

Mr Mofokeng (ANC) commented that the Department must ensure that they deal with the issue of vacancies because the delay in service delivery was a result of the large number of vacancies within the Department. He asked if the DG agreed with this and whether he saw the high rate of vacancies as a problem.

The DG replied that he did not think that this was a problem in the DOH. The vacancy rate in the DOH was twenty percent. The problem was not lack of employment but rather scarcity of skilled labour. For example, it was hard for them to recruit pharmacists because they had to compete with the private sector, and the private sector generally paid better than government. They need pharmacists in the medical control arena.

Mr Mofokeng noted that according to the Department’s Annual Report, their vacancy rate increased year after year. He asked if they were worried about this or if it was in fact a skills problem.

The DG explained that they had discovered that they were in fact not abolishing posts which should had been abolished. This had the effect that, when they created new posts, their organogram grew and reflected vacancies. It was human error and they simply needed to start abolishing posts. The figures in the Annual Report reflect these human errors and they were incorrect figures. In reality, he said, their vacancy rate was approximately seventeen percent.

In reply to the Chairperson said that this meant that there was incorrect monitoring, the DG said that in this matter, that was true.

On the same point, Mr Mofokeng said that from 2005 to 2006 the vacancy rate increased. To him this meant that, even after they recognised the human error, the vacancy rate was still increasing.

The DG replied that they had only realised the error after the Annual Report was published. Those posts should have been abolished as a result of reorganisation.

The Chairperson asked why posts were being created and abolished on a yearly basis. How did that situation come about?

The DG offered the following example. They might advertise vacancies for pharmacists at Grade 11 but then might not be able to find suitable persons to fill those posts. They would then upgrade that post to a Grade 12 post, thus creating a new post. At the same time, they should put in a request to abolish the Grade 11 post. Because this was not being done, superfluous posts were reflected.

The Chairperson said that this sounded too elementary. If they could not do something so elementary then what did that reflect about their level of workmanship. He wanted to know why these things could not be picked up.

The DG replied that in terms of their current structure, they did not have a corporate services section. They were restructuring to expand the capacity of the Department. Their new organogram had 3 deputy directors-general (DDGs). Their structure had to be beefed up to deal with gaps where there was a capacity problem.

The Chairperson said that adequate monitoring was a problem. The same issue came up over and over again. Senior managers must do their work. It seemed that nobody was supervising or monitoring and this had to take place.

Mr Trent commented that they must have a database telling them how many people to pay. Surely that would be the number of people working for them. He also wondered why they would publish figures that were not correct. The report was a public document and they relied on it. He was worried that there was a problem with the Department’s system. He asked if it was possible that they could be paying people in abolished posts.

The DG replied that the system could identify who it must pay. The organogram was not related to that. He agreed with the Chairperson that it was a question of proper auditing and supervision.

The Chairperson said that Department must fix their inaccurate figures for vacancies. However, there was no confusion as to whom they were paying every month. He was satisfied that there was no problem in that regard.

Mr Pule (UPSA) asked if the Department knew how many posts were vacant and the Chairperson asked the DG to supply the Committee with comprehensive information on this and the DG agreed to do this.

Mr Mofokeng noted that the Department audit committee which deals with monitoring, should meet four times year, yet they had only met twice in 2006. He asked how this problem could be solved.

The DG replied that the audit committee was now meeting regularly. They had a vibrant audit committee now, which they did not have in the previous financial year.

The Chairperson asked what kind of support the audit committee received from the Department.

The DG replied that they met when necessary. Senior managers attend all audit committee meetings. They had reviewed capacity in an internal audit and would work together, providing support when necessary.

The Chairperson commented that the support of management was necessary for the audit committee.

Mr Bonhomme (ANC) referred to the Audit Report and noted a particular instance where the Department did not provide audit evidence for an adjustment.

The CFO of the Department replied that it related to the coding and allocations in the Logos system. An adjustment took place related to the fact that the Department had spent a lot of money in Johannesburg upgrading a hospital and the payment went through as a payment in respect of buildings. The assets were overstated and the buildings had to be accounted for in the Public Works books. The reconciliation was done after publication of the Annual Report and could not be corrected in time for the audit. He said that they were in the process of correcting it now. They had also trained their staff about this and were ensuring that this would not happen again. He added that the Logos system was extremely user-unfriendly and not easy to work with.

Mr Trent noted that the Auditor General reported that the Department did not come up with its environmental plan. It should have been done after the Act came into operation and it was four years on now. He asked if it had been done.

The DG replied that it was done when the Auditor General did the audit report. However, it still had to be finalised at a political level although it had been developed. Thus, they were awaiting the necessary political endorsement.

Mr Trent asked if the objectives of the provinces were aligned with the Department in regard to hospital services. He asked if the Department could see which provinces were meeting these objectives and if they were not, if the Department could assist.

The DG replied that they could.

The Chairperson commented on the Hospital Revitalisation Programme saying that some programmes had to be stepped up as there was a lack of resources.

The DG replied that there were ongoing talks with Treasury to see how this could be done.

The Chairperson referred to the Statement of Financial Performance section of the report and referred to the amounts written off. He asked if the financial transactions or liabilities had increased.

The CFO replied that the Department used to run a Nutrition Programme which had been moved to the Department of Education. They had already made advances to provinces to kick-start this programme and that amount had to be written off by their Department.

The Chairperson asked for a comment on the fact that the report showed an increase under ‘’Other debtors’’.

The Financial Director of the Department replied that they had granted bursaries and many bursary holders had failed. These amounts had to be written off. He went on to say that they were very cautious now in awarding bursaries and explained that these debtors were not only for the past financial year but was a cumulative number. He said that they had also been burgled and the loss was significant. As a result they had now appointed security staff. The Department did make an effort to recover debt and writing off debt was a last resort.

The Chairperson turned his attention to spending trends for strategic health programmes. He expressed concern that most under spending occurred in the HIV/AIDS cluster. He said that in the private sector under-spending was a saving, but in the public sector full spending was an expectation as it meant service delivery. He said that with HIV/AIDS and hospital revitalisation, he would have expected that there was overspending. What was their plan to monitor effective spending?

The DG replied that there was no under-expenditure at the level of programme implementation for the conditional grant. The under-spending was not to do with HIV/AIDS treatment but was in the area of national prevention strategies. This was regrettable as prevention was a very important area but there had, for example, been a delay in delivering condoms because of the defects found in them. In that matter, the Department had been very strict with their suppliers. This had caused delays, and this had in turn resulted in under-expenditure.

The Chairperson commented that the fact that the under-expenditure was in the area of prevention did not diminish its seriousness, and the DG agreed.

The Chairperson decided to close the discussion here and commented that the encounter was an improvement from the previous one with the Department. He closed by saying that he did not wish for them to take one step forward and two steps back.

Department of Public Enterprises (DPE); Interrogation of Audit Report
The DPE delegation included the Director General, Ms Portia Molefe, Ms Sandra Coetzee Deputy Director General: Corporate Governance and Policy, and Mr A Shaw (DDG)

The Chairperson commented that the audit report of the Auditor General had not found anything alarming to report on. He said that other departments must look at DPE and see how they get it right, when others perpetually get it wrong. He said that it was very unusual for the Committee to congratulate a Department that came before SCOPA. He had gone through the report of the audit committee and there was a good record of attendance. The audit committee also compliments the Department about the support they give them. He added that a clean audit did not just happen; it was the human factor.

The Chairperson turned to the Department’s expenditure trends. He noted that money could not be transferred to DENEL. Apart from this, their expenditure would have been ninety nine percent. This was unheard of. In the public sector those who fully spend (without irregular expenditure) should be getting bonuses. He went on to say that the Committee was satisfied, and very happy about the Department’s audit.

The Chairperson noted that the Department’s five year financial performance review had been completed and asked the DG what they had found.

Ms Portia Molefe replied that they had been doing this on an annual basis and found improvement right across the board. There was a move toward strengthening capitalisation – especially DENEL. She said that they were on target as far as that plan was concerned so there had been an improvement.

The Chairperson looked at the Administration programme and noted that there had been an increase due to public road show initiatives. He wanted to know if this was a once-off or if it would impact on spending in the next financial year.

The DG replied that this initiative should stay. They wanted a program where BEEs and entrepreneurs could get a competitive advantage and they went on road shows to show people what was available.

In terms of vacancies, the Chairperson asked DPE how they fared.

The DG replied that they had a 13% vacancy rate. Filling vacancies was tough as competing with the private sector was hard. For example there were two specialist positions that they had been trying to fill for over a year. One had to find ways and means to get around these problems.

The Chairperson referred to legal actions against the Department and noted that the Annual Report showed a substantial increase in legal fees to a current amount of R3 million. He asked if there was concern about the upsurge of litigation against the Department.

The DG replied that R2,3 million of that figure related to a court settlement from 1993. In that case a person had been injured and that money was due to him. This amount was captured as legal fees while it was, in fact, compensation. So the increase the Chairperson referred to was, in fact, a small increase. The DG went on to say that the legal action against the Department was not upsetting, only the cost of the defence.

The Chairperson referred to the Denel transfer and asked how it happened that the Department was unaware that earlier transfer would necessitate VAT. He said that it was an unnecessary blot on their expenditure trend and should have been foreseen.

The DG replied that in the last financial year a change had been made by Treasury and they received an instruction from the Auditor General that transfer payment would be VAT-able.

The Chairperson referred to the issue of staff debtors and the fact that there had been an increase from 30 to 363. He asked if they had problems managing debt, especially since it related to staff.

The DG replied that some of that debt was over three years old and they could not trace it so the Auditor General said that they should leave it. If they give a bursary, for example, and the person fails, then that amount becomes reclaimable and it gets written up as a debt. She said that for three years they did try to do everything to get the money back.

Mr Stevens (DA) said he had a question which the Minister of Finance replied to the day before. He said that there had been a payment by Treasury to SAAB on behalf of Denel. He wanted to know if it was a contingency liability payment and what exactly it was in aid of.

The Chairperson noted that the question did not relate to the Annual Report but he would allow it anyway.

The DG replied that it related to the transaction between Denel and SAAB. A historical contract existed which they had to make a payment on.

Mr Gumede (ANC) noted that the findings of the Auditor General said that there was nothing to report on. However, he had a question regarding risk and sustainability in terms of Alexkor. Was not the Department expected to further manage these things?

The DG replied that the Alexkor hospital had been transferred and was managed by the Northern Cape provincial government. The Department was not worried about the risks attached to that. This issue also tied up with historical transactions and the Department was trying to get closure on it. Once all these assets were transferred, the risks moved to the buyer.

Mr Gerber (ANC) asked about Aventura. He said the report indicated that there was a preferred bidder, but another bidder had been awarded the sale. He asked for clarity.

The DG replied that a transaction had been concluded. Afterwards, another party claimed that he should have won as he was the preferred bidder. This was in fact not the case. There was a court case pending. The party making the claim did not have any evidence and she was confident that the Department would win the case.

The Chairperson thanked the DG and said that he hoped the Department would maintain this kind of performance.

South African Airways (SAA): Interrogation of Audit Report
The delegation included the Chief Executive Officer (CEO), Mr Khaya Ngqula, and Acting Chief Financial Officer, Mr Chris Els.

Mr Stephens referred to the financial risk management of SAA. He noted that they had a history of their risk management itself being a risk. He asked what procedures they had put in place to ensure that hedging did not become managing.

A delegate from SAA replied that the SAA Board would not speculate in any commodity. They stuck to a very specific policy with conservative, strict parameters. There was also a financial risk subcommittee that met every two weeks. They considered current market conditions and made recommendations to the Board subcommittee. It was a cumbersome process but it was designed to prevent the reoccurrence of risk as in the past. They applied this process rigorously.

In reply to Mr Stephens asked if they use derivatives, the delegate replied that they did not. He joked that they use “plain vanilla” instruments as was said in the trade.

Mr Madigisa (?) asked what plans they had to improve the poor attendance of the audit committee.

The CEO replied that the audit committee only had three members. One (Mr Moyo) resided in the UK, but the other were always available. They also talked to their directors as much as possible. They were very pleased as they were very close to the business.

Mr Madigisa commented that in his opinion a 44% attendance rate (as the audit report showed) was below par. He asked the CEO why he personally never attended the audit committee meetings.

The CEO replied that he was not a member of the committee so he went only by invitation.

Mr Gerber referred to the comment in the report that most of the five subsidiaries of SAA were technically insolvent. He noted that the only one without problems was SAA City Centre. He reminded them that they said that improvements were coming, and asked when this problem of insolvency would cease.

The CEO replied that they were going through a restructuring process. Some of the subsidiaries had to be fully capitalised and put onto the market. Then they would not have this problem again.

Mr Gerber asked why SAA was not the official carrier of the Springbok rugby team to France.

The CEO replied that the following Friday, SAA would make a presentation to them to request their being the official carrier. They used to have such an agreement with the rugby team but that had not been so this time around. He quipped that even though they did not transport the team, they had transported all the spectators.

Mr Gerber then commented that there were many Members of Parliament and their families who did not fly SAA. He implied that there must be a reason for this, and asked the CEO what he thought it was.

The CEO replied that it was not obligatory for Members of Parliament to fly with the national carrier as it was in the UK and the USA. He added that during the holiday season the SAA operated on the basis of being 80% full. If one did not book one month in advance, one could not get a flight. He suggested that this might be the reason some MPs did not fly with SAA.

Mr Gerber asked for clarity about consultant costs in respect of Mango.

The CEO replied that the consultants were KAPA. They were a company that operate out of New Zealand. They helped SAA to start Mango. They were amongst the best-rated companies for this in the world. They did an excellent job for SAA.

Mr Gerber noted that there had been a planned disposal of two Boeing 747s by public auction but complications had been noted. He asked what had happened.

A delegate from SAA replied that there were problems so SAA cancelled the tender and investigated alternative ways of disposing of the aircraft. Investigations about this were still underway.

Mr Gerber referred to the note in the audit report regarding fraud and illegal acts. These acts covered a broad range including employee fraud, misuse of Voyager miles, management override, and procurement. He asked what steps they were taking to address these.

A delegate replied that a whole system of controls would be put in place. This was expected to be in place from April next year.

Mr Gerber said that there were no controls in place at the moment as one could purchase tickets online fraudulently. This had already resulted in a loss of R 14 million. He asked for clarity as to how they would improve this situation.

The CEO said that in future one must produce one’s credit card and identity document at the airport. If it did not correspond then SAA would not provide the ticket. So in this regard there had been an improvement.

Mr Gerber said that the report stated that in the Revenue Department of the SAA a capacity and staffing problem had been reported. It was reported that there was low morale amongst staff, as well as lack of experience and qualifications. He asked for comment.

A delegate replied that this particular department within SAA was a strategic department. Management had addressed the shortage of staff and skills during training sessions between April and June. They were improving staff morale by motivating them and adding an element of competition such as introducing things like ‘’employee of the month’’. He added that 99% of transactions were processed by the tenth of the following month, so they were happy with the progress they were making here.

Mr Pule revisited the earlier point about the CEO attending meetings of the audit committee. He asked the CEO if he was happy that he could only attend these meetings if he was invited.

The CEO replied that he was always invited.

The Chairperson indicated that the meeting had to come to an end. However, further issues would be flagged. He noted that there were certain areas that presented challenges and they needed to be attended to.

Meeting adjourned.