Public Works, CBE, PMTE 2016/17 Annual Reports, Auditor-General input; with Minister and Deputy

Meeting report

The Chairperson welcomed the Members and delegates to the meeting, and extended a special welcome to the Minister of Public Works, Mr Nkosinathi Nhleko, and his Deputy, Mr Jeremy Cronin. He said the programme for the day included the presentation of annual reports from the Ministry of Public Works, the Council for the Built Environment (CBE) and the Auditor-General’s report on the performance of the Department of Public Works (DPW).

Minister’s Opening Remarks

Mr Nhleko introduced the Acting Director General of the DPW, Mr Sam Vukela, and disclosed that the Director-General had since left and joined the National Housing Agency as chief executive officer (CEO).

He said the DPW’s policy statement was rooted in the goals and objectives of the ANC which were outlined in its Ready to Govern document. The twin goals were:

• The development of a sustainable economy;
• The development of state infrastructure that would improve the quality of life.

The expected outcomes of infrastructure developments were job creation, poverty eradication and income generation through an Expanded Public Works Programme (EPWP), using labour-intensive methods of construction, development and maintenance.

Development was intended to make use of local content and local companies. The policy statement was a also a product of consultations that had been conducted with both internal and external stakeholders.

Policy priorities were:

• Development and finalisation of appropriate legislation and policy;
• Job creation through the EPWP, the development of the economic infrastructure network, and Operation Phakisa;
• Transformation of the construction and property sector by growing and developing black-owned businesses while increasing the supply and availability of management and technical skills;
• Building the capacity of the Department to deliver through the creation of internal strategic enablers;
• Improved governance of entities and professional councils.

To improve its policy and legislative base, the Department had started the process of reviewing the White Papers of 1997 and 1999 respectively. This process would eventually lead to the drafting of the Public Works Act. There would be corresponding amendments to the entities’ Acts, such as the Council for the Built Environment (CBE) Act, to align them with the socio-economic transformation imperatives. Construction sector codes and the Charter would be launched in October 2017 and all procurement processes would be aligned with the Charter. The property sector charter had already been launched in June 2017. The aim of the Charter was to increase the participation of previously marginalised groups in the economy. A property empowerment policy had also been developed with the intention of activating the sector charter and codes. The aims of the property empowerment policy were:

• To increase equitable access to property;
• To support the development of black-owned and managed business entities;
• To create an enabling environment for the development of small to medium-sized black property entities;
• To break down all structural barriers to the development of black owned business entities.

A monitoring and evaluation mechanism would be developed to ensure implementation, and a transformation co-ordinating committee would be set up for this purpose. To support struggling black businesses in the construction sector in the current difficult economic conditions, the downgrading of contractors had been suspended and new regulations that reflected the state of the economy would be introduced. To address the challenge of late payments, new regulations were being devised in consultation with the National Treasury. To address the high levels of unemployment, the EPWP and Operation Phakisa, which aimed to rehabilitate ports and harbours, had been developed. These initiatives were meant to reduce unemployment and to provide livelihoods for women, the youth and the poor, as well as those with disabilities.

Through the Medium Term Strategic Framework (MTSF), the government intended to create six million work opportunities through the EPWP by the year 2019. The EPWP had created a total of 741 540 job opportunities between 2015 and 2016. Operation Phakisa was estimated to attract investments worth between R12 billion and R20 billion by the year 2019 through the hosting of investment conferences at the facilities that were being renovated at the harbours and ports. It was projected that between 1 000 and 2 000 jobs would be created through these investments. The renovations that were being carried out at the ports and harbours in the Western Cape in support of the oceans economy, were worth R300 million. This would also lead to the empowerment of small to medium-sized black businesses and cooperatives through shareholding in national companies.

The Independent Development Trust (IDT) had been placed under investigation to address allegations that had been levelled against it. The entity had been an implementing agency in the delivery of social infrastructure development for the past 27 years. To improve governance and performance, a new board had been appointed in November 2016. The Construction Industry Development Board (CIDB) would also be reconstituted in November 2017, as the term of office expired. A new entity called Agrément South Africa (ASA) had been created, in compliance with legislation.

Professional councils were facing many challenges, some of which had been in the media, and the Department was working together with the CBE to assist with the governance challenges facing these bodies. The South African Council for the Architectural Profession (SACAP) had instituted legal action against the Minister to prevent him from appointing additional members to the Council board. Forensic investigations had also been instituted against SACAP to address concerns raised by stakeholders. A forensic audit had also been commissioned against the South African Council for Project and Construction Management Professions (SACPCMP). The Engineering Council of SA (ECSA) had also instituted legal proceedings to dissolve the Council.

The structural capacity building of the Department was continuing, with the Property Management Trading Entity (PMTE) finalising its organisational structure. All the critical vacancies were being filled up and the process of terminating all contract and seconded positions was underway. Challenges faced by the PMTE included resignations of staff holding key positions, unscheduled maintenance which brought the risk of collusion and corruption, and the absence of documented business processes and systems.

The Minister said that there were no drastic amendments to the policy statement, with the only change being the areas of focus. He hoped the policy statement would assist the Department and its entities in developing strategic and annual plans with their corresponding budget processes.

Discussion

Mr M Figg (DA) expressed concern that the matters that were contained in the document presented by the Minister should have been done a long time ago. He argued that there was need for the DPW to involve local people in projects, but was dismayed that the people that were engaged to work on local projects came from distant places. The document was good, but there was a need to implement the ideas contained in it. He asked whether the right people were going to benefit.  Regarding the suspension of the downgrades, he wondered whether mentoring was being done for small businesses. He also wanted to know how much money was being invested in the rehabilitation of the harbours and ports. The figure had been changing, and he wanted confirmation that the indicated figure of R300 million was the correct one. He also sought clarification on the resignations that had been reported in the document, and further information on the duplication of payments to service providers.

Mr D Ryder (DA) also agreed that the document was good, but questioned whether the priorities in the document tied up with the priorities of the DPW. There was a need to re-look at the vision and priorities of the Department, as oversight visits had shown that the Department was not meeting people’s expectations. The Committee had visited the prison in East London and the facilities of the staff were abysmal. Even the magistrate’s court was incomplete after 16 years. Was the DPW addressing its mandate? He also complained that even though nearly all the money that had been budgeted for the year had been spent, many targets had not been met, which indicated that the money was not being spent on the right things. The Department needed to improve its communications with the other government departments. He asked the DPW to make timely payments, as it had a bad name for not paying on time. He argued that holding back payments was not right, as it created problems for businesses who ended up being unable to pay their workers and unable to fulfill other financial obligations, resulting in their losing their tax certificates.

Mr M Filtane (UDM) said he could not find anything new in the document, either in content or in context. The problem was with the implementation of programmes. He asked how the DPW was going to deal with under-performance. He claimed the Department had embarked on a purging spree so that it could give contracts “to your own people.” Someone had made a deposit of millions of rands to the ANC. Contracts were being given to people who would pay back money to the ANC.

He asked what research had been done to prove that there was a turnaround in the DPW, asserting that there was no accountability in the Department. He also bemoaned the lack of black contractors on the projects being undertaken by the Department, saying there were no black contractors in places like Transkei, even for simple projects like gravelling a road. Bringing people from Pretoria to gravel roads in Umtata was not right. He argued that there was no localisation and local people were not benefiting.

Commenting on the Department’s plans to enhance its policy and legislative programme by reviewing the 1997 and 1999 White Papers, he maintained that there already was a sufficient legislative and policy programme. The crucial issue was how the Department would support black companies. On the suspension of the downgrading, he wanted to know for how long this would continue. When the suspensions were stopped, what would happen to those who should have been suspended? Was the DPW going to give those people jobs for which they did not qualify?

On reports that 745 540 job opportunities had been created, he wondered how many of them would hold on to their jobs, and asked if the Department would be making follow-ups on this matter. He also wanted to confirm reports that some contractors were going to give people on-job training. Did the DPW do pre-training or on-job training? Did contracts have that provision?

Dr C Madlopha (ANC) welcomed the report, but advised that there was a need to put in place a mechanism to deal with non-performance by staff. Some progress had been made, as in 2012 it had been almost as if there was no department, no systems, and no contracts. Reports were just put together through cut and paste, and one could see that some of the things in the reports were from previous years. Nothing had been happening, and that was why the turn-around strategy had been adopted. She was glad that there were achievements recorded in the report by the Minister. There was a need to re-visit the criteria for upgrading so that the process could be more inclusive. On the duplicate payments to service providers that had been identified, she said it sounded like corruption. She asked what would be done to people who were involved in the double payments. She expressed concern about reports that some workers’ contracts would be terminated, asking what the implications would be for the sustainability of the Department’s programmes.

Ms L Mathys (EFF) wanted to know what the role of the transformation coordinating committee was. There was a need to transform every sector, and even though the ANC talked about transformation, she was concerned that there may be more looting of state resources. One needed to find out why the boards were not working, instead of just changing people. It was known that these entities were also being used to loot resources, which was why everyone wanted to appoint board members. On the EPWP, she alleged that some councillors were asking for sexual favours just to include women on the programme. She also asked why the DPW was outsourcing some core functions of the Department, leading to people fighting and some even being stabbed for the opportunity to be engaged. She wanted to know more about how the Department intended to upgrade and maintain infrastructure, as there were still children using pit-latrines and police working in dilapidated facilities.

Ms E Masehela (ANC) affirmed that the policy document was good, but she was nevertheless also concerned at the perennial problem of lack of implementation. There was a need to devise a table that would show the progress being made. She wanted to know more about the termination of all contractual and seconded positions. She encouraged the Department to make timely payments to contractors and all people to whom it owed money, especially the black contractors who risked collapse, as their capital base was not very strong. She urged the Department to avoid gravelling roads as this was not helpful, particularly in the rural areas. She commented that there was money that had not been utilised under the EPWP, and yet the roads were not done.

Dr Madlopha advised the Department to go to Hout Bay, saying it was a disaster. There were people carrying out illegal activities in the harbour and there was no security. The Harbour Master had no phone, there was no electricity, and no maintenance of the facilities had been done. The main harbour structure had no roof and no windows, and people often came with boats for the sole purpose of stealing.

The Chairperson said the Committee would engage with the Department on some of these issues on the Thursday following the meeting, and disclosed that the Minister would also be available for the meeting. The oversight report would be sent to the ministry.

Minister’s response

The Minister agreed with the sentiments expressed by the Members about the need to involve local communities in the development projects. However, the active participation of the local communities should go beyond jobs and lead to the locals being involved in the care and maintenance of the infrastructure.

On the matter of transformation, he said that the extent of the problem was not fully appreciated. Black people owned less than 10% of the property, and there was a need to be worried because this was an ingredient for social instability. He recognised the need for implementation -- the Department was addressing the issue, and the Committee would be updated regularly on progress being made.

On the question of perceived or real corruption, the Minister said the Department had always encouraged people to expose corruption. He also reminded the Members that if they were aware of any corruption in the Department, it was their duty as public representatives to report known cases to the necessary authorities. He expressed his displeasure at what appeared to be personal attacks in the comments of Mr Filtane and Ms Mathys, saying “we need to move away from this colonial idea that every black person was there to steal. In the apartheid days, a black person had to justify his presence in a white area because it was believed that every black person was a thief. If you have evidence that some of these things that you allege were happening, go and report them but do not accuse people without evidence. Accusations take away the dignity of the other person”. He found the accusations of corruption offensive.

On the late payments to contractors and other service providers, the matter was not just one of justice, but it was also a matter of performance and should be part of the performance assessment because a payment was a delivery.

On the argument that the policy and legislative programme of the Department was sufficient and did not need enhancing, he drew attention to the fact that the DPW was one of the few government departments that operated without an enabling or empowering legislation.

The Minister agreed that there was a need to improve real estate management in order to maintain and rehabilitate infrastructure.

It was a misconception that the DPW was purging staff by terminating contracts. The Department was regularising and not purging staff. It was terminating the contracts of outsourced staff, including those that had been seconded to the Department, so that it could employ full time staff. The Department was also in the process of decentralising some of its functions in a bid to encourage more public participation and to empower black companies.

He clarified that the EPWP was a social intervention programme intended to alleviate poverty. It was not just meant to create jobs, but was also meant to provide social security.

The suspension of downgrading was not about relaxing the overall standards. The standards would still be maintained.

Answering the question of how non-performance would be addressed, the Minister disclosed that there were 1 382 people who were additional to the establishment in the Department, and that somehow these needed to be absorbed into the organogram so that there would be better performance appraisals. Professional bodies that were linked to the Department needed to be guided so that they were in line with transformation. The Minister also disclosed that the Department was also expanding the capacity of its workshops.

Deputy Minister Cronin responded to the question about the vision and mission of the Department. He said the core mission was the management of the property portfolio of the government, as well as the regulation of the built environment entities.

Referring to the progress of people who had been employed through the EPWP, he revealed that 12% were now in permanent employment, while 4.5% had established their own businesses, and a good number were now working in the informal sector.

The Chairperson thanked the Minister for presenting the report and answering the questions that had been put before him. He added that the Auditor-General’s report would also provide additional information on how the Department had been performing.

Council for the Built Environment: Briefing

Mr Phuti Manamela, Planning Manager::CBE, said the Council’s mandate was the regulation of the built environment professions, and served as an appeal body for all built environment professions. The Council had aligned its 2015-2020 strategic plan to the Minister’s policy statement, and transformation was a priority. It had organised an indaba on the conceptualisation of transformation. It was also working on building its own capacity and had mooted plans for getting more tutors and teachers. Among the major challenges facing the Council was that it depended on stakeholders to meet most of its targets.

Among its five-year strategic goals and priority areas for 2016/17, it had adopted the National Development Plan (NDP) the MTSF 2014-2019, and the Industrial Policy Action Plan (IPAP) in its strategic plan. This should result in decent employment through inclusive growth, a skilled and capable workforce to support an inclusive growth path, and an efficient, effective and development-oriented public service.

The CBE’s performance highlights included:

• It had achieved 73% of its targets, while 27% were not achieved. Internal controls had operated as expected, and no irregular expenditure had been incurred in the financial year;
• There had been an unqualified audit for the year 2015/16;
• CBE’s partnerships with universities of technology had been a success, with the placement of 200 interns;
• A transformation strategy had been developed for the Councils for Built Environment Professions (CBEP);
• 450 learners had been enrolled in the maths and science support programme;
• 50 candidates had been sent on work placements;
• The final report on the implementation plans of the three partnerships to improve technical capacity within municipal, provincial and national departments, had been developed;
• The final report on compliance with the Public Finance management Act (PFMA) by the six councils for the professions had been developed;
• All appeals lodged had been finalised within the statutory time limit

Mr Manamela also listed the key challenges faced by the CBE. These were:

• Dependence on stakeholders to achieve targets, which resulted in some failures;
• The CEO had been suspended and eventually dismissed;
• The Information Technology (IT) Department needed to procure new equipment and improve connectivity. Some targets had not been achieved for this reason;
• There were five vacancies at the Council level;
• Management of the occupational lease;
• Relocation of the Council to new premises.

Total revenue earned in the 2016/17 was R46.438 million, against the budgeted revenue of R45.661 million. The positive variance was R 777 000. The CBE had received a grant of R43.413 million from the DPW. Additional revenue generated from CBEP levies brought the total revenue to R45.661 million for the year. The actual performance of the CBE resulted in a deficit of R1.814 million.

All the audit findings from the previous year had been resolved, except for the IT governance, where the findings had been repeated. Consultants had been engaged to assist in improving the performance of the department, and a new manager had been employed.

Discussion

Ms Masehela said that there had not been much progress regarding human resource development, with many positions still vacant, and asked what the bottlenecks were and what was being done about it. Why had only one target been achieved? Why was there a lack of capacity in the IT Department when so many were trained in that area? What were the processes for people to be included in the Recognition of Prior Learning (RPL) programme, and why was it so slow?

Dr Madlopha congratulated the Council for achieving unqualified audit reports for consecutive years. She was, however, concerned over the Council’s report that it depended on stakeholders to meet its targets. How did it hope to get clean audits over matters it had no power over? For how long was it going to depend on consultants? She sought clarification on the irregular expenditure in the report. She expressed disappointment over the low numbers of females in the profession, and particularly pointed to the lack of female representation in the delegation that had come before the Committee.

Mr Ryder commented that the Council had raised more money than it had budgeted for, but had ended up with an over-expenditure. He wanted to know what had caused the over-expenditure. He also wanted to know who the manager was for the programme that had failed to meet a single target.

Mr Filtane asked what the socio-economic impact of the Council’s programmes was.

Mr Figg also asked why the CBE had a deficit, and asked what the timeframe for the RPL was and when it would stop.

CBE’s response

The Council admitted that there were problems, and requested assistance in addressing the lack of female representation. It had identified a lack of opportunity to get exposure to the profession, and it planned to influence children at an early age.

It attributed the poor performance of the IT department to the absence of the IT manager, who had been ill for a long time and had since resigned and been replaced by another person.

On how the Council hoped to maintain clean audit records, it said it was exploring the possibility of having shared services, such as shared internal audit services with the stakeholders. The Council’s internal auditor had already started reviewing internal mechanisms.

The deficit had been caused by the use of surplus funds for a longstanding project, which was known and approved by the National Treasury. The Council asserted that it was 100% compliant, and circulars from the National Treasury testified to this.

Office of the Auditor-General: Report

Ms Dipalo Shea, Senior Manager, Auditor General of South Africa (AGSA) commended the CBE for obtaining clean audit outcomes by submitting financial statements that were free of material misstatements and for complying with all relevant legislation. The DPW and Construction Industry Development Board (CIDB) had remained stagnant with unqualified audit outcomes, with findings on other areas. The audit outcome of the Property Management Trading Entity (PMTE) had regressed to an adverse audit outcome from a qualification in the prior period. The Independent Development Trust (IDT) had remained stagnant with a disclaimed audit outcome in the current period.

The negative audit outcomes at the PMTE and IDT were attributed to a lack of effective financial management disciplines, inadequate reconciliatory processes and management’s inability to implement action plans in a timely manner at these entities. There was a lack of credible financial reporting throughout the year at the PMTE and IDT to enable leadership to review and take appropriate and timeous corrective action where required. Leadership was urged to enhance oversight and adopt a zero-tolerance approach to non-compliance with legislation. The slow response by management was recognised as the key root cause that had resulted in the regression in audit outcomes.

PMTE Audit Outcomes

There had been a regression from a qualified audit outcome in 2015/2016 to an adverse audit outcome in 2016/17. There had been incorrect use of data in determining the value of assets in the assets register. The entity could not provide supporting documentation for accrued expenses due to inadequate systems for maintaining records. About receivables, it had been difficult to ascertain the exact figures recoverable from client departments because there was no relevant supporting documentation. The PMTE had also failed to provide supporting documentation for scheduled maintenance due to inadequate systems for maintaining records.

IDT Audit Outcomes

The systems and processes to identify and accurately record all programme expenditure incurred on behalf of client departments in the financial period had been inadequate. The IDT had not recognised revenue due to it from project management fees for the year under review, as the systems and processes to identify and accurately record all programme expenditure incurred on behalf of client departments were inadequate. The disclosed prior period error contained misstatements due to programme expenditure not being recognised in the period to which it related.

Budget Expenditure and Performance

Ms Shea said the PMTE total budget for all its programmes was R14.5 billion, of which just over R14.2 billion was spent -- equivalent to a spending rate of 98%. However, only 21 out of 39 targets were achieved. In performance terms, the level of achievement was 54%.

The DPW total budget for all its programmes was R6.513 billion, of which R6.403 billion was spent -- equivalent to a spending rate of 98.3%. However, only 19 out of 32 targets were achieved, representing a success rate 59%.

Five key construction projects had been audited across the DPW, PMTE and IDT, and it had been found that four of them were not achieving the desired progress. Potential fruitless and wasteful expenditure was identified on these projects that could result in an overstatement of the value of the assets created. Projects had been significantly delayed and spending was significantly over budget. Supply chain management (SCM) processes had not been followed, which would result in irregular expenditure.

• The upgrade of the Van Rhynsdorp Correctional Centre under the PMTE had been budgeted at R192 million, but there had been overspending of R92 million, bringing the total to R284 million.
• The upgrade of the Skilpadhek Border Post had been projected to cost R244 million, but the actual expenditure had escalated to R337 million, registering overspending on the budget of R93 million.
• The upgrade of the C-Max Correctional Facility had had an initial budget of R134 million, but the first contractor had failed to complete it after being paid R115 million. A new contractor had been engaged and another R170 million would be spent on the project.

Ms Shea said the top three root causes identified by AGSA were the slow response by management, instability or vacancies in key positions, and lack of consequences for poor performance and transgressions. Its recommendations were that quarterly feedback must be given on the implementation and progress on action plans, management must provide quarterly feedback on controls implemented on key projects to avert fruitless and wasteful expenditure, and quarterly feedback on consequence management must be provided on action taken against transgressions. The Committee had to request feedback on the actions taken to improve the financial health at PMTE and the IDT.

Discussion

Mr Figg said that some of the findings needed serious action against the perpetrators. The same mistakes were being repeated, and this was unacceptable.

Ms Mathys said the findings were unfortunate, and it was a sad state of affairs. All the people responsible should be held accountable.

Mr Ryder said that there was regression at the PMTE on three lines. Expenditure without supporting documentation was a serious matter, and he asked if this indicated that there were no systems in place.

Dr Madlopha thanked the office of the AG for the work that it was doing and for the information that was provided. She lamented the fact that most of the officials at the PMTE had resigned. She asked, what the role of the AG was after the findings – did it make any follow ups on the issues that had emerged or made any interventions to assist the Department and prevent any further regression?

Mr Filtane asked what the AG was empowered to do beyond reporting. Did it think that the current legislation empowered it sufficiently to identify the officials who were responsible? Did the Department make use of AGSA as witnesses when transgressions were taken to court? Was AGSA able to calculate how transgressions had been perpetrated? He added that no one seemed to dispute the findings of the AG, but nothing was done about it.

Ms Masehela said the report was an eye opener, and the Committee had experienced some of the things that were in the report. The issue of poor record keeping was scary. She asked whether government departments sought help when they experienced difficulties with managing their finances.

The Chairperson reminded the Members that as a Committee they had powers in terms of the Powers and Privileges Act. He asserted that the Committee, through the Speaker of the House, could take punitive measures. As far as he knew, the AG had no powers apart from recommendations to the National Treasury. Members should not under-estimate the powers that the Committee had. After 23 years, the situation could not continue.

Ms Shea disclosed that the PMTE was using manual systems, to the visible shock of the Members. It said that due to high volumes of work, the risk of human error was very high. An accounting package had been procured for the entity, but up to now it had not yet been implemented.

She said that AGSA followed up on recommendations, and interim audits were also done. However, it could not do anything if the entity said it was not ready. The Standing Committee on the Auditor-General (SCOAG) was in the process of making amendments to the Public Audit Act of 2014 in order to give the AG more teeth to bite. The AGSA had a project called “A Status of Review Record,” which was meant to assist departments to correct their mistakes.

Ms Mathys asked to what extent AGSA could provide evidence about contractors.

Mr Figg lamented the use of the outdated Excel spreadsheet by the Department in the modern age. He also asked if the AG was used as an expert witness in court cases.

The Chairperson said the Public Audit Act did not allow the AG to take punitive steps, as its role was just to forward recommendations to the National Treasury and to the Committee. Perhaps the Committee needed to get quarterly reports from the AG. He recalled that the AG engages with the Standing Committee on Public Accounts (SCOPA) on a quarterly basis, whereas the Portfolio Committee engaged with the AG on a yearly cycle. He proposed engaging with the AG before engaging with the Department in future. He also asserted that the office of the AG could not act as a consultant to the departments, as that would compromise its independence. He criticised the fact that the Department was not yet computerised.

The AG said that there was a considerable shortage of skills and some project managers were being overstretched as they were supervising too many projects, resulting in poor supervision. The consequences of that were evident in the issues that had been raised by the report.

The meeting was adjourned.