Public Finance Management Act & Preferential Procurement Policy Framework Act: implications for State Owned Companies

Meeting report

National Treasury on Public Finance Management Act & oversight of State Owned Companies
Mr Higgo du Toit, National Treasury Chief Director: Public Sector Oversight, and Mr Lloyd Ramakoba, Director, briefed the Committee. The objective of the PFMA was to secure transparency and sound management of revenue, expenditure, assets and liabilities of institutions. Key provisions of the PFMA were the timely submission of corporate plans and annual budgets. SOC financial statements had to be audited by the Auditor-General or another registered auditor in consultation with the Auditor-General. All public entities had to annually submit borrowing plans to the Minister of Finance.

Focus areas for financial analysis of SOCs was whether sufficient profit was made to cover operating expenses, and the review of capital expenditure in relation to budgets and targets. Strategy and policy focus areas included questions as to whether the SOC properly fulfilled its mandate in line with the NDP; and whether targets were appropriate and linked to performance indicators. Capital spending had to yield intended outcomes and service delivery improvements as per the National Development Plan (NDP). The SOCs had to submit borrowing programmes in the Corporate Plan, and had to report on a quarterly basis on the borrowing programme. Delays in planned funding could indicate delays in rolling out of planned capital/infrastructure projects.

The guarantee for SOCs as at 31 March was R466 billion against exposure of R209 million. Adherence by SOCs to guarantee conditions was an important oversight focus area for the Portfolio Committee. Bonuses for executive directors had to be linked to performance. Increases in annual salaries were contained but compensated by high incentives/bonuses. A review of SOC Board composition showed that the majority of the Board tended to be dominated by financial expertise.

Implications of Preferential Procurement Policy Framework Act for State Owned Companies
Mr Willie Mathebula and Mr Solly Tshitangano, Chief Directors in National Treasury, briefed the Committee. Section 217(2) of the Constitution did not prevent the State from implementing a procurement policy providing for a category of preference in awarding contracts, and the protection/advancement of persons, or categories of persons, disadvantaged by unfair discrimination. The PPPFA prescribed a preference point system followed in the awarding of tenders, and aligned the policy framework with the aims of the B-BBEE Act. It was also applicable to SOCs. Goals had to be clearly specified in tender documents. Regulation 9 provided for local content/designations. A two stage bidding process was prescribed, with the first stage focused on functionality and content, and the second on price and B-BBEE. Concerns had been raised that the Act went against section 217(2) of the Constitution, and that it could hinder transformation and redistribution. The actual problem with SOCs was that empowerment targets were not disclosed, and that statistics on companies empowered prior to 2011 were not provided. Oversight could be assisted through the release of procurement information and advertising of tenders. Procurement information had to be released monthly, quarterly or annually, depending on the type of information.

Discussion
Ms N Michael (DA) asked at what point National Treasury refused a government guarantee. There was a trend for SOCs to approach Treasury to bail them out. The question was at what point Treasury would say that no further money was available. The SAA had relied the most on guarantees. She asked if SOCs that had reneged on their agreements with Treasury, had been named. She asked how the amount given to Eskom to bail it out, had been determined, and what the terms and conditions were. She asked about time frames when an entity approached the Treasury for a guarantee.

Mr du Toit replied that slow economic growth and growth in government debt went side by side with the growth in the demand for guarantees. Still the debt component was not big. Guarantees were given to get people out of trouble. It had worked well with Denel. Extended guarantees were given, with stricter terms and close monitoring. It was hoped that the same could happen to SAA. A guarantee could assist a turnaround.  Treasury operated from the finance side, but there was also a political imperative that was adhered to. Treasury reported bi-annually to Cabinet on breaches of agreement, and would write to the Minister responsible for the SOC. In terms of the PFMA, it had an impact on revenue when a guarantee was paid. But the executive authority was accountable. The Treasury recommended that the first question to be asked was whether guarantee conditions had been met.

Mr Ramakoba added that Eskom announced an 8% increase in tariffs in March 2014. Eskom had to engage with debt. There was a search for the best fit to get Eskom out of trouble. There had to be a capital injection, which would lead to additional debt.

Mr K Morapela (EFF) referred to compliance with the PFMA. There were accounting tactics and tricks used when a SOC cash flow analysis was needed. There were allegations about multinationals taking money to use illegally offshore. Books were manipulated. He asked about measures against such abnormalities.

Mr Ramakoba replied that the term “cash flow” had been used too loosely. The SOCs used the framework prescribed by the Auditor-General. Impact and sustainability had to be stated. One could see whether an entity was in trouble by the way it reported.

Mr Morapela asked about the pros and cons of foreign and local borrowing.

Mr du Toit replied that the main borrowing was still in the domestic market. There had been attempts to diversify, but the country was out of sync with the economic downturn, as it was still crashing. Guarantees were then increased, for counter-cyclical investment. Money had to be invested in productive infrastructure. When there was short term foreign borrowing, it had to be certain that debt could be repaid. It also had to balance what could be borrowed in the domestic market. A large loan could be obtained from the World Bank that would meet the needs of SOCs and the loan could be obtained at a lower price.

Mr Morapela asked if boosting of remuneration through bonuses, rather than salary, was illegal. He asked if the matter had been raised with the SOCs.

Mr duToit replied that there were only guidelines regarding bonuses. Bonuses were not illegal, but it had to be linked to performance. A 100 percent bonus could not be claimed when only 60 percent of targets had been met. The executive authority could play a role on account of the shareholder by annually reviewing remuneration.

Mr Morapela remarked that the dominance of financial experts on boards made performance suffer. Financial gurus did not have developmental capacity. The SOCs had to be development driven. The Committee would do well to look into the matter. But the situation could not be turned around while there was deception about cash flow.

Mr Mathebula replied that there were legal implications around disclosure of information. Treasury had issued instructions for information to be disclosed to enhance compliance monitoring. Treasury looked at capacity to deliver. There was a capacity development drive. Capacity development of procurers was the responsibility of the Accounting Officer.

Mr Morapela agreed that there was a tendency to only look at quantity of procurement, to economise through paying lower prices. But quality also had to be looked at.

Mr Morapela referred to the transparency of tenders. The DA had made mention in previous meetings of difficulties in gaining access to Medupi contracts. It had to be public knowledge what the tender entailed. There was confidentiality for the benefit of interested stakeholders. Fair practice had to prevail. Suspicions had to be minimised about how the tender had been awarded.

Mr Tshitangano replied that tender information could not be disclosed in the interests of fair competititon. Yet a way to disclose information was needed. Information was required from Eskom in the current year. There had to be rules for putting tenders together. Tenders were not put together properly because there was lack of awareness of tender regulations.

Mr Morapela said that the SOCs had to be viewed in terms of economic empowerment. There had to be charitable programmes. It had to be known how many people had benefited from development.

Mr R Tseli (ANC) said that he would like to see an overview per entity, regarding compliance performance and submission of documents.

Mr Tseli said that executives were giving themselves bonuses at the expense of people who were doing the real work. Executives were saying that people at the lower and middle levels were not performing, and at the same time claimed bonuses for themselves. If people below them really did not perform, the senior executive would never have been in a position to qualify for a bonus.

Mr Tseli suggested that there be an awareness campaign in provincial government departments about what was expected when tender documents were submitted.

Mr Tseli referred to government officials who did business with government without disclosure. He asked if the Treasury could pick up on that.

The Chairperson responded that officials were not allowed to do business with government. Treasury was sometimes aware that it was being done.

Mr Mathebula confirmed that business with government was prohibited.

Mr Tshitangano added that sometimes it was known that a person worked for government. Municipalities were not in the same system, and could not be monitored. There was a new branch looking into that.

Mr Tseli referred to the statement that a tender could not be awarded to someone "who only had a wheelbarrow". The question was how to deal with that issue within the context of transformation and empowerment. In his province an applicant had to have R100 000 available. Those who had the money continued to get the tenders.

Mr Mathebula replied that provincial prescriptions did not require a tender to have a certain amount of money. Bidders were not to be disqualified by means of a threshold.

Mr Tshitangano added that tenderers had to be qualified. Grading had to be improved. But capacity was not the only criterion. In the Free State, points were awarded for a tenderer being provincial or district based. When the functionality of a tenderer was evaluated, it was usually asked if the tenderer had done similar work before.

Mr E Marais (DA) noted the increase of 5.5 or 6% for the remuneration of the board. There was runaway remuneration for executive members of SOCs. The gap between the bottom and the top was extremely wide. The State had to set an example in that regard.

Mr du Toit replied that it should indeed be asked if executives were earning too much. It was impossible for management to perform if it were not supported.

Ms D Letsatsi-Duba (ANC) remarked that Treasury managed public purposes. There had to be guidelines and a regulatory framework. The shareholder and the executive authority had to be able to act in line with regulations.

Mr du Toit replied that it was not a Treasury function to determine salaries. The Department of Public Service and Administration (DPSA) had to give guidelines, also to the lower tiers of government. With respect to bonuses, the Treasury looked at performance. Where there were big bonuses, it had to be noted what an individual had achieved.

Mr Marais said there were PPPFA policy measures that prescribed scrutiny of companies and contractors. But there were some who slipped through the net and could not fulfill contract obligations. Then the whole process had to be repeated. BEE had to be supported, but even so contracts had to be completed. The question was how to scrutinise better. Many contractors defaulted. Where he was from, the tarred road around Bloemhof was in a very bad condition.

The Chairperson referred to financial oversight and the corporate plan. The question was what happened if there was no compliance in focus areas. She asked about the impact of non compliance on socio-economic development through the SOCs, and the financial impact thereof. It was the main focus of the Committee to see that the SOCs contribute to socio-economic development. She asked what the C ommittee could do if the SOCs did not submit financial statements.

Mr du Toit replied that it was an issue whether the SOCs had to be developmental or commercial. The question was whether an SOC had to make a profit or contribute to the overall economy. The SOC's mandate was to get returns. But returns were dismal compared to listed companies in the stock exchange. The Water Board had to trap investment and implement it, but there had to be tariffs from which everyone could benefit. No profit layer was added. But government was sometimes naughty. It told Eskom to roll out electricity to the underprivileged, but the question was whether government should be held accountable for that. Treasury worked with the philosophy that the SOCs had to split contributions between the core mandate and the social mandate. Eskom was told to roll out, but it was not stated from where money would come. In the end it had to come from each tariff payer, or else the government contribution was paid by the taxpayer.

Ms Letsatsi-Duba noted that the Department of Trade and Industry (DTI) could authorise procurement that was not local, if it could be shown that it was not locally available. She asked if the DTI could verify that. She asked if untimely authorisation could cause delays, and if it was punishable by law not to wait for DTI authorisation.

Mr Mathebula replied that industries designated for local procurement were clothing, leather and footwear, among others. There had to be 100% local procurement. If raw material was not locally available, the bidder could submit a bid and request authorisation from DTI. This especially held true for products like shoes for the police. The bulk of such raw material came from Europe and China. The DTI had to decide if local industry would benefit from outside procurement. It could be a case of materials from the outside helping to create jobs locally.

Dr D Luyenge (ANC) noted that Treasury thought it well to not suspend infrastructure development, in the interests of service delivery. That was being done in the context of slow economic growth. He asked about implications for long term borrowing.

Mr du Toit replied that the question was whether the government was spending enough on capital growth versus operational growth. Spending on capital expenditure promoted growth. Treasury asked if deficit increase before borrowing was justified, if it was done to fund capital expenditure. Treasury saw infrastructure spending as a long term investment. When a project like Medupi stalled halfway, costs escalated.

Dr Luyenge remarked that performance bonuses had rightly to be awarded for extraordinary excellence that actually showed. People in the municipalities were earning millions. It seemed that mediocrity was being promoted.

The Chairperson noted that Eskom and Transnet were complaining that the premium for procurement was too low, and that it hindered transformation.

Mr Mathebula replied that Treasury was aware of such concerns. The ratio for procurement above R1 million was 10/90, and for those below R1 million, 20/80. The bulk of procurement was below R1 million. The SOCs were complaining that the 90/10 ratio was prohibitive. Treasury was saying to the SOCs that the regulations only came in during 2012. The SOC had to state which companies it had empowered. Treasury could review on the basis of that. Analysis by Treasury showed that the bulk of the SOCs complained that they did not have the capacity or knowledge to apply the Act. Treasury asked that statistics be given of how companies were empowered while the SOCs were exempt.

Mr Tshitangano added that Eskom had put together documents in the previous year to apply for exemption. The Minister rejected the application. Sanral also wanted exemption, and Transnet was engaged on this the week before. Exemption was linked to tenders.

The Chairperson concluded that the Committee would keep in contact with the Treasury. She asked that information be submitted well ahead. The Treasury could notify the Committee if information had to be kept confidential.

Adoption of Committee minutes
Minutes of 10 September 2014 were considered and adopted without changes.

Adoption of draft Committee programme
The Secretary outlined the programme to the Committee. Themes and areas to be covered included the budget review and BRRR report, and Annual Reports. Expenditure trends had to be analysed and compared to the previous year. There would be briefings on Annual Reports. Annual reports were still outstanding for Denel; INFRACO; SA Express Airways and South African Airways. Decisions had to made about which entities would be visited for oversight. The Eskom entities of Medupi and others, was suggested.

Mr Morapela said that the Department Annual Report had not yet been received.

The Chairperson noted that the Annual Report had to be submitted on 31 August. She asked the Committee Researcher to guide the Committee.

Ms Lee Branwell, Committee Researcher, replied that the Annual Report had to reach Treasury within five months, and Parliament one month after. They should find out from the Department when it was tabled. If it was late, the Committee had to be informed.

The draft Committee programme was adopted.

The Chairperson adjourned the meeting.