2019/20 DPE Audit outcome: AGSA briefing; DPE Annual Report; with Deputy Minister

Meeting report

The Chairperson welcomed the Committee, the members of the Auditor-General of South Africa (AGSA), and the Department of Public Enterprises (DPE) to the meeting. He noted that the meeting would be in two parts -- the AG would provide a briefing on the audit outcomes for the Department in the first session, and the second session would be a briefing by the Department on its 2019/20 annual performance. The Committee would be involved in another joint session later this evening with the Standing Committee on Public Accounts (SCOPA) on the South African Airways (SAA) business rescue plan. Minister Gordhan would be joining the meeting by 10h00, as he was attending Cabinet.

AGSA on DPE’s 2019-20 audit outcomes

Mr Fhumulani Rabonda, Deputy Business Executive, AGSA, explained that his role was to provide oversight on the audit. He was joined by Ms Uviwe Ruxwana, Senior Audit Manager, AGSA, who was responsible for the audit of the Department, and who would be assisting in responding to questions from the Committee. Ms Angeline Gouws, Mr Sybrand Struwig and Ms Christine van Zyl, were members of the AGSA who were in attendance in the virtual meeting.

Mr Rabonda presented on the 2019/20 audit outcomes of the Department. He reminded the Committee of the AG’s reputational promise, which was a constitutional mandate to strengthen the country’s democracy through the messages that it sent in its audits. This work would assist the Committee in assessing the performance of the Department.

The focus of this briefing was on the unqualified opinion with no findings (clean audit) and the financially unqualified opinion with findings, because it affected the outcomes of the Department.

The Department’s outcomes had been achieved for the past four years since 2015-16, but it had been unable to maintain these positive audit results for the current financial year. This regression was based on material misstatements identified in the financial statements submitted for audit. The Department had managed to correct this, but the audit methodology required reflection on this matter as it had failed to submit financial statements that were free of material misstatements, and avoided the qualification only by adjusting the findings that the AG had identified.

Mr Rabonda commended the Department for submitting the financial statements on time, even during the pandemic.

The three key areas of the material misstatements that resulted in the Department’s regression in the audit outcome included:

• Related parties – relationships and transactions between the DPE and state-owned enterprises (SoEs) not adequately disclosed;
• Disclosure of impairment of investments; and
• Disclosure of contingent liabilities.

 

In terms of financial health, the Department was identified as a going concern. Asset and liability management was noted as the only area of concern, as the Department had realised an accrual adjusted deficit for the year based on impairments of investments in state-owned companies (SOCs). An accrual adjusted net current liability position had been realised. If the Department was on an accrual basis of accounting, its net current liabilities would have exceeded its net current assets.

In the current financial year of 2019-20, the Department had incurred R27 000 in fruitless and wasteful expenditure - as expenditure incurred in vain, which could have been avoided if reasonable steps had been taken. It was a decrease from the R181 000 incurred in 2018-19. Most of the disclosed fruitless and wasteful expenditure for the current year was caused by no-shows and cancellation fees.

The Department had measures in place to implement accountability processes that included investigating the fruitless and wasteful expenditure when it was incurred. The irregular expenditure of R821 000 was a result of the opening balance of the 2017-18 year, and this had been condoned in the current financial year 2019-20. The closing balance had been zero as a result of this.

There was no irregular expenditure identified in the current and previous year.

AGSA had recommended that the Department should include a review of classes of transactions, account balances and disclosures made in the financial statements against the requirements of the modified cash standard in the review of the final annual financial statements to ensure that the financial statements complied with the requirements of the modified cash standard.

The recommendations to the Committee were to request the accounting officer and the Minister to provide feedback on the implementation and progress of action plans, to ensure improvement in the audit outcomes of the Department.

In closing, Mr Rabonda commended the Department for obtaining an unqualified audit opinion and for submitting its financial statements by the legislative deadline. The DPE was advised to focus on its year end processes and to ensure that these were adequate to be able to detect errors in disclosure items that were not part of its monthly reporting and reconciliation.

Discussion

Mr S Gumede (ANC) asked for clarity on the presentation slide titled “Important to note,” and referred to the last block on outstanding audits. He commented that the word “outstanding” was confusing because it could mean “to excel,” or to figures and calculations that had not been submitted. Was this an accounting word that was used in a situation of this nature? There was concern about the irregularities and fruitless expenditure reflecting the previous years and the shortfalls. Why was there a need to reflect the irregular and fruitless expenditure of previous years when it did not impact on the current year?

Ms O Maotwe (EFF) asked the Department how it would address the “going concerns” in presentation slide 15. She proposed that the Committee note the recommendations outlined on slide 22 so that they could be executed. She asked if there were internal auditors to audit the Department internally, or if the AG was the only entity that came around once a year.

Ms C Phiri (ANC) emphasised the recommendations made to the Department. The Committee should acknowledge the reference to the shortfalls and note the recommendations so that they could work together.

Ms J Tshabalala (ANC) was encouraged by the audit outcomes. She asked the AG if it was comfortable that the Department had enough financial controls, checks and balances in place to detect other areas that it had highlighted as areas of concern. It was good that the Department did not have irregular expenditure. She asked what the reasons for the outstanding audits were, as this process should have been completed by now.

AGSA’s responses

Mr Rabonda responded to the question on the “outstanding” audits, shown on slide seven, and said that this was just a legend to depict if there was any audit that was not completed. The reason that the AG was sharing the message only on the Department alone, without the SoEs, was because there were quite a few SoE audits under the Department that were still outstanding, which means that they were not yet completed. This was what the blue box in the slide indicated.

On the question of irregular and fruitless expenditure and why prior years were depicted, the two years 2019-20 and 2018-19 were shown for the sake of comparison. There had been concern to avoid the narrative and confusion between what was sitting in the financial statements of the Department, and what was shown in this briefing. The Department’s financial statements and the presentation that it intended to share included the closing and opening balances. This was to ensure that the AG closed this loop and showed that the money in the opening balance came from the prior 2017-18 financial year. This was the reason why the prior years were shown -- it was only for reconciliation purposes, not about raising an alarm.

In response to Ms Maotwe’s question on “going concern,” the AG was not looking at the Department’s ability to meet its dues or liabilities, because there was no channel to do this. This comparison was to reflect on the outcome if the AG prepared the financial statements on an accrual basis. He invited Ms Ruxwana to add clarity on why this had been raised as a concern. This was not rated as an intervention required, but rather just as an area of concern. He would respond to the question on internal controls after Ms Ruxwana had provided clarity on the ongoing concern.

Ms Ruxwana explained that the ongoing concern was not a matter of highlighting it as an issue. She referred to the financial viability of the Department, and clarified that it would be on a cash basis of accounting. The AG did this comparison to see what the state of the Department would be if it was on an accrual basis of accounting. The accrual adjusted deficit was mainly because of the impairments that had to be done on the investments that had been made in the SoEs. The Department would not have had the deficit if the SOCs’ investments were not impaired.

On the accrual adjusted net current liability position, the Department’s financial statements indicated that there were things sitting under disclosure items, and not on the face of the financial statements. In this area, the AG went to the disclosure items such as the accruals and the employee benefits. If the Department was on an accrual basis of accounting, it would have had to bring these things to its balance sheet, and this would have affected its position. It did not mean that the Department was unable to pay its liabilities because it was on the cash basis of accounting.

Mr Rabonda responded to the question on whether the Department had been able to address the internal controls that had alerted, and said that the answer was yes. This was why it had been rated “concerning and needing improvement,” not as an intervention. Senior management -- the Chief Financial Officer (CFO), the Director-General (DG) and internal audit – had to pay more attention to these year-end processes. The AG was of the view that because these structures existed, it would be able to get the Department back to the situation where there were no material issues in every area that had been audited.

Follow-up discussion

Mr Gumede commented that the report had been clear and it was easy to understand the finances. He asked for clarity on his view, that if the AG were to put together the performance of the SoEs with that of the Department, this would have meant that the Department would have accrued a deficit. Was there a stage in the coming years where it would include the performance of the SoEs together with the Department which could give it an adverse performance report?

Ms Tshabalala asked why the AG had not completed the audits of the entities. She asked what the benefit of accrual accounting in this instance was, as this involved transfers to entities which were audited in their own right.

AGSA’s response

Mr Rabonda acknowledged that the slide was causing confusion, and said he would take the feedback to the colleagues who had been involved in preparing the slides. This was purely an accounting matter. Each SoE was audited in its own capacity as a company or an entity, and had its own audit report which did not translate into the audit opinion of the Department. This meant that there would be no impact in that regard.

Ms Ruxwana’s note on the accrual impact on the DPE referred to its investments in SoEs such as Alexkor, SAA and Denel. Those investments were no longer worth the money that had been invested. In the case of SAA, it was in business rescue, so the money that had been invested there did not guarantee that this was what the DPE would get out of the entity.

The accounting standard, which was the modified cash standard (MCS), had led the Department to an impairment. An impairment was a reduction in the value of the asset, which in this case was the reduction of the value of the investments that the Department had in those SoEs. This had affected the financial statement of the Department, because it was the money that had been invested there. The impairment was not reflected in the main financial statement, which was the income statement, when the MCS framework, which the Department was currently using, was used. It did not affect the income and the expenses or the surplus of the Department. This impairment would need to go through the income statement if an accrual basis were to be done, which the SoEs were on. This meant that there would be a major multimillion-rand expenditure that would lead to a deficit.

The slide was raising an alarm in areas that were not necessarily considered key. The message was mostly for the Department about what needed to be done to ensure it was alerted to this particular risk. He commented that the AG would make sure that this message was clear and did not cause unnecessary confusion in the future.

Mr Rabonda asked the Chairperson if the response to the reasons for the delay in SoE audits could be addressed during the next engagement with the Committee, where the outcomes for the SoEs would be tabled. The reasons for this delay would be covered in this presentation.

The Chairperson noted the recommendations by the AG, and said that the Committee would do its oversight responsibility, taking them into consideration. These findings must be raised with the Department and the Minister to improve the outcomes.

He thanked the AG for the presentation and proposed a five to ten-minute recess before starting the next session.

Second session introductory comments

The Chairperson continued the meeting at 10h00. He said that the Minister was not present, and had sent his apologies. He asked the Deputy Minister, Mr Phumulo Masualle, to address the Committee before leaving the virtual meeting.

Deputy Minister Masualle said that the Director-General would lead the DPE’s presentation. The year under review had been filled with many challenges, but the Department had tried its best. The economy had been negatively affected in this context and some of the entities had had to manage in a constrained environment. The DG would provide a detailed account of the activities the Department had managed to achieve, and the performance levels it had managed to record.

DPE 2019/20 annual performance report

Mr Kgathatso Tlhakudi, DG, Department of Public Enterprises, provided an overview of the non-financial performance of the year on predetermined objectives.

The overall annual performance for the 2019/20 financial year had been 73%. The Department reported on 30 indicators, and 22 targets had been achieved. This was a slight regression from the performance that had been achieved in the previous years. This was because of various reasons, and the fact that the last financial year was one of consolidating after a number of changes that had taken place in the Department.

One of the targets that was not achieved was the Green Paper for the SOE Bill not being developed. This would gain momentum with the Presidential State-owned Enterprises Council (PSEC) being put in place. The Department had to allow this process to take its course.

The budget cuts were one of the major challenges in the Department, which needed to mobilise resources to inform this kind of work. It was expected that the budget cuts would be deeper going forward. Overarching legislation on government shareholder management, which was the SOE Bill, would be prioritised going forward.

The report on the social impact assessment of SOC’s corporate social investment (CSI) programmes had not been produced because of the delayed conclusion of the bid evaluation process. The study had been deferred to the 2020/21 financial year.

Adjustments had to be made to the localisation programme during the year, which was why the Department had been unable to achieve the assessments of SOCs’ localisation quarterly reports on the implementation that was supposed to have been submitted in the last financial year.

Seven 2020/21 shareholder compacts were not signed because of delays in finalising them due to financial challenges experienced by some of the SOCs. To date, only the South African Forestry Company Limited (SAFCOL) 2020/21 compact had been signed.

The DPE’s annual performance of previous years indicated an average of over 80% achievement, so there was no doubt that this would be achieved going forward.

Financial performance

The Chief Financial Officer (CFO) provided an analysis of the DPE’s expenditure. The total spending, excluding payments for financial assets or transfers to the SOCs as at the end of March 2020, had amounted to R246.3 million, or 87.1% of its budget allocation. However, it had transferred the entire R56.6 billion allocation to SOCs, which had brought the DPE’s overall expenditure up to 99.9% of the annual budget.

The spending on compensation of employees (COE) and goods and services was at 87.6% and 84.9% respectively, which was lower than the budgeted amount. This was because of unfilled posts and the non-implementation of the development of the Green Paper for the Shareholder Management Bill. The Department was in the process of filling critical posts.

There was no irregular expenditure reported in the 2019/20 financial year. The fruitless and wasteful expenditure of R712 835.65 was carried forward from the 2015/16 financial year. The Department had instituted an investigation to determine the cause of the expenditure. This investigation had been concluded, and the Department was currently in the process of implementing recommendations received by the investigators as part of the actions to be taken.

The Department continued to maintain a sound governance and compliance framework on how it utilised its resources. It had obtained an unqualified audit opinion with findings for 2019/20. The AG had identified one material misstatement in the reported performance information for Programme 3, and this had been subsequently corrected.

The AG had identified three material misstatements in the financial statements, and these had also been corrected. The misstatements were on disclosure notes on related party transactions, prior period error and impairment of investments. The Department had put measures in place to prevent a recurrence of the same errors and would continuously improve its internal controls.

Discussion

Ms J Mkhwanazi (ANC) welcomed the audit outcomes by the AG in the first presentation. She asked the Department about its plans to strengthen its internal controls within the Department. It was noted that the PSEC must take priority to be implemented in the non-achieved outcomes. She asked for clarity on the impact of the non-implementation of the assessments of the SOCs’ localisation on the whole programme.

Mr G Cachalia (DA) raised concern that the continuous “whitewash” must end. The Minister was not at this meeting, and this was against the backdrop that he had indicated that R2.1 billion was being borrowed per day, mainly because of “zombie SOEs.” In view of the expenditure and non-achievements of the SOEs, the Committee was being fed the same narrative every year, and this year was no different. The reality was that all the areas that had been identified, where there had been ostensible achievement, had amounted to a consolidated picture that was worse than before. When would the Department re-present this and reflect on it in an honest way? The Committee could talk about fixing only once this was done.

Mr Gumede congratulated the Department on the unqualified audit statements. There were concerns, but it was better that the status quo was maintained. The only concern was that there had been an audit without findings for four previous consecutive years, and that there was only an issue in the 2019-20 year reflected in the presentation.

He welcomed the fact that critical vacancies were going to be filled. Had all the vacant positions on the boards been filled? He appealed to the DG and the Deputy Minister, as the Committee did not want to be responsible for allowing SOEs to crumble and die. Some of the non-achieved targets had been outstanding for over a year. The SAA target had not been achieved because its performance had been dependent on business rescue. There was concern as to whether the other targets would be achieved by 2021. He proposed that the Committee receive an update on progress before the final year end.

It appeared that Denel had been downgraded. What could the Committee do to save the situation, even if this was not the case? There had been ideas that the Committee was going to negotiate at the last meeting on the quarterly reports, to get Denel moving and on its feet. SA Express and Denel were collapsing, or on the brink of being collapsed. He was interested in knowing the state of these two entities, and what the DPE had in place to sustain them. He sought clarity on how SAA and Eskom were being dealt with. Alexkor, SAFCOL and Transnet were at least breathing, so the Committee could begin to resuscitate SA Express and Denel.

Ms Tshabalala proposed that the Committee meet physically to avoid the challenges of network issues, because it was important that the work was done. Her concerns and questions had been covered by Ms Mkhwanazi’s comments on matters that needed to be followed up. There had been good feedback on the Department’s unqualified audit. On the matters that had been raised regarding the Committee’s oversight role on the ailing SOEs and the plans in place, it was better to have a plan that would speak to their resuscitation – what needed to be considered, and the finances that the Committee could work with. The country was undergoing serious financial constraints, and COVID-19 had not made it easy on all sectors, entities and departments. It was better that the Committee worked with a plan, and then followed it. SOEs had been ailing and the Committee was aware of this.

The Committee could not expect the Ministers to attend every meeting when there were already so many meetings. It was unfortunate that the Committee expected the Minister to attend when it had a Department led by the DG who consistently attending these meetings, and senior executives who attended and were dealing with these matters, so that it could deal with political overviews.

Ms Tshabalala commended the Department’s work. The Committee wanted it to continue its work and would hold the Department accountable on its promises.

Alexkor would be dealt with next week. The Committee would wait to learn what could be done at Alexkor, what was being done, and what the issues of the Richtersveld Community were. This was part of the Committee’s programme, which had noted that it wanted to go on an oversight visit. It must be prioritised as a matter of urgency from the Committee’s side, so that it could understand the situation and deal with it.

DPE responses

Deputy Minister Masualle acknowledged the Committee’s comments, and said the point was that this was not the last time the Department was coming before the Committee, as it would return to deal with the difficult issues in an objective and constructive way.

He noted Mr Cachalia’s concerns about the Minister’s non-attendance, and explained that the Department had to make sure that it was adequately represented for this meeting because Cabinet met on Wednesdays.

Mr Tlhakudi responded to the issue on localisation. The Department had managed to make serious progress on the amount of local work that it had been able to create in the country. The reports that had been presented were those that the Department compiled on a quarterly basis on the performance of the entities. He asked the Chairperson if the Department could at a later stage share some of the work that major SOEs were doing on the localisation front. This was in response to Ms Mkhwanazi’s question on the non-achievement on localisation. The Department measured the entities in their shareholder compacts on local content. In the other transformation targets, the ratings took place in small businesses with marginalised communities.

The Department was doing relatively well on internal controls, but it was recovering from an era with large irregular expenditure that had now been condoned. It was doing a lot of clean-ups internally on historical contracts, where wrongdoing was being identified. Action was being taken whenever these irregularities were picked up in the Department. The Department was happy where it was at, but was aware that it could still improve going forward.

The PSEC would be up and running and the overarching regulatory framework was one of the critical areas that would be receiving attention from it going forward.

Mr Tlhakudi noted Mr Cachalia’s concerns, and explained that he would have an opportunity when the entities presented to the Committee to get a deeper appreciation of the state of the entities. There was some good work that was happening in these entities, despite some of the issues that they faced. These entities were the instruments of implementation of the Department’s developmental objectives. There were many people whose careers and businesses that would ordinarily, in the dark past, not have been possible, and who had found opportunities to do things they would not have done in the past. This should be commended, as this was the role that SOEs played. These careers came with the upliftment of the whole family, and the private sector could play a big role in this regard as part of the social compact, or social cohesion, that the Department had entered into.

He noted Mr Gumede’s comments, and assured him that the Department was attending to the findings of the unqualified audits. The COVID-19 pandemic had affected the Department. The AG’s report indicated some of those findings in the notes that the Committee had interpreted differently. Those were areas that could easily be addressed going forward. The Department was taking lessons from this year’s audit outcomes, and wanted to get back to the clean audit streak that it had over the last few years.

The Department was in the process of filling the vacancies, and would get back to the SOE boards. There was a proposal to strengthen the boards, and there should be an announcement made in the next couple weeks. The boards, as well as the current annual general meeting (AGM) season, had been raising these issues with the Minister.

Mr Tlhakudi assured the Committee that the chairpersons were attending to these challenges. The Department had to assess how many more SOEs could be set up, especially with the new economies and technologies that were coming into play. How would the Department ensure that it leveraged its SOEs to ensure that in the renewable space, for instance, it did not become a technology colony?

The SOE Bill had been outstanding for some time, which went back at least two terms. This had been raised as an issue that had to be worked on. The Department had noted the comments by Mr Gumede on this issue.

The DPE was working hard on the issues around Denel, and had appealed to various forums within government. It had challenged the management of Denel to create awareness that it had an order book seeking innovative partnerships in order to ensure that this order book was executed, and that the people were kept busy. The Department expected it to help itself while waiting for assistance.

On SA Express, the liquidators had announced its preferred purchaser of the business. There were some legalities involved, but the Department should hear from it in due course as the other airline got back up in the air. The staff had taken their future into their own hands as they were part of a consortium that was poised to purchase this particular business, and this was something that should be commended, because it showed worker empowerment at its best. The leads in this consortium were commendable for creating the space for employees to play a role, and the Department wished them all the best in seeking to satisfy the remaining conditions of the liquidators for them to be able to take over the business.

Mr Tlhakudi noted Ms Tshabalala’s support for the work that the Department was doing. He assured the Committee that a lot of effort went into the work, with the lead of the Minister and the Deputy Minister, engaging with the SOEs on a regular basis to understand where they were with the promises that they had made in previous engagements, so that everyone was kept honest.

Ms Maotwe asked Mr Tlhakudi what plans were in place to achieve the targets that had not been achieved. Would those targets be abandoned?

Mr Tlhakudi responded that the Department intended to continue with some of the targets to ensure that they were achieved in this financial year. The assessment the social impacts of SOCs were continuing under this financial year.

The localisation was referring to the quarterly reports that had been achieved but were unfortunately delayed. The shareholder compacts were being cleaned up through the AGMs. For the next financial year, the Department was ensuring that these would be signed off ahead of the financial year.

On the optimal structure for Alexkor, the Department was working closely with the company to ensure that it had a lasting solution. The SAA and SA Express targets had now become academic, with the entities now being in business rescue and liquidation. The Department was putting its efforts into ensuring that it had a viable, solid, and sustainable SAA going forward, which was what was needed. It was reliant on connections with trading partners and sources of tourism. If it allowed foreign carriers to bring people into this country, those revenues would stay outside of the country.

The Chairperson thanked the presenters and the Committee Members for attending the virtual meeting. He noted the importance of acknowledging the presence of the Deputy Minister and the Department in the meetings. The Committee had a duty to assist SOEs and the Department so that there could be favourable outcomes.

The meeting was adjourned.