AGSA briefings on Forensic Investigation and Mandate; Legacy Report, with Deputy Minister

Small Business Development

21 August 2019
Chairperson: Ms V Siwela (ANC)
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Meeting Summary

The Committee met to receive two briefings from the Office of the Auditor-General of South Africa (AGSA). The first was on a forensic investigation and the second was on its mandate and role. The Committee also discussed its programmme and Legacy report. The Deputy Minister was in attendance.

During the Fifth Parliament, the Committee asked the AGSA to investigate:

-Compliance of the DSBD to the guidelines and standard operating procedures (SOP) of the Black Business Supplier Development Programme (BBSDP) and Co-operative Incentive Scheme (CIS);
-The validity of the processes followed in awarding incentives to grant applicants;
-Confirmation of the authenticity of suppliers and quotations;
-Verification that goods and services were actually delivered/received; and
-Monitoring and reporting processes followed by the DSBD subsequent to the approval and payment of the incentives to the beneficiaries.

In its progress update, the AGSA indicated that the investigation focused on the 2015/16 and 2016/17 financial years. 

Some of the findings were that 34 grant applicants had a turnover above R1 million, however these applicants were not registered for VAT. The AGSA noted multiple instances where preferred service providers that quoted above R1 000 000 did not include VAT in their quotations. They also failed to provide their VAT registration number on their quotations. These quotations, amounting to R12 050 625 were accepted by the BDOs. One supplier was registered for VAT according to the SARS website but did not charge VAT on their invoice. The invoice was for an amount of R136 0000. During the investigation we identified that directors of multiple companies applied for and received grants exceeding the R1 million threshold. In one instance CIPC searches indicated that the service providers who submitted quotations for tools and equipment share a common director. One instance was noted where a member of a co-operative appears to have made a false declaration in their application submitted. The application reflected that the applicant and service provider are not connected. However, CIPC searches reflected that a member of the co-operative, is also a director of the approved and paid supplier.

The AGSA reported that management has indicated that it will arrange training for all officials working with the processing of applications and claims to ensure compliance. The Department’s HR Unit is assisting with the process and it is envisaged that training will resume in the first quarter of the new financial year 2019/20. Management also intends to institute disciplinary action against officials for non- compliance with the BBSDP guidelines. Management will further open cases of fraud against the officials, grant applicants and service providers with the South African Police Service. The AGSA has been assisting the legal counsel representing the Department in the disciplinary hearings with the drafting of the charge sheets issued to the officials in preparation for the disciplinary hearings. Disciplinary hearings have been provisionally set to be held on 12- 13 September 2019.

The AGSA highlighted that it was unable to share the full report with the Committee prior to it being finalised and tabled in Parliament

Members sought clarity on which authority had referred the investigation to the AGSA, lamented that money which was meant for small business ended up with officials and expressed frustration about the outdated IT system used by the Department.

During the induction presentation, the AGSA highlighted that the root causes of continued poor outcomes included blatant disregard for controls, compliance with legislation and AGSA recommendations; continued capacity gap in administration; vacancies and instability slow down systematic and disciplined improvements; unethical behaviour in administration and by political leaders leadership’s inaction / inconsistent action to addressing persistent transgression.

The AGSA highlighted that it contributed to the oversight work done by the Legislatures. It held briefings with the oversight bodies on the annual performance plans and assessed the implimentability of annual targets. It shared the audit outcomes annually and provides progress updates of current year audits. The AGSA attends and provide briefings (clarity) during public hearings and oversight visits, conducts road shows after each audit cycle (PFMA and MFMA) and shared performance audit outcomes when its due.

Members asked about the spike in outstanding audits, the comprehensive risk assurance model and whether the ASA audited external firms.

The Committee Content Advisor informed Members about the Committee’s activities during the Fifth Parliament. During this period, the Committee processed two bills.  Other activities included oversight visits where various projects and programmes financially supported by the Department and entities wear visited in Gauteng, KwaZulu Natal, Mpumalanga, Eastern Cape, Limpopo and Free State. Furthermore, the Committee conducted a study tour to Mondragon and Madrid in Spain. The Committee carried out extensive stakeholder engagement with numerous small enterprise representatives, big business and heard expert testimonies from time to time by inviting experts in areas to present to the Committee as and when necessary. Throughout the 5th Parliament, the Committee held a view that the fundamental challenge antagonising the Department has been its inability to produce a corresponding organisational structure embedded into its strategic plan. Consequently, DSBD has produced and presented to the Committee three different strategic plans. The last strategic plan and organisational structure, approved by the Minister in 2017, was subsequently submitted to the Department of Public Service Administration (DPSA) for concurrence. However, there has been back and forth with no finality on the matter. In terms of the Public Service Regulations, the Minister of Public Service Administration must approve organisational structure of a national department. The Portfolio Committee observed and recommended during its 2015, 2016, 2017 and 2018 Budget Vote and Budget Review and Recommendation Report (BRRR) processes that the organisational structure must be given priority. At the time of concluding the legacy report, beside the position of a Deputy Director General - Enterprise Development and Entrepreneurship, all other top management positions, including that of the Accounting Officer, were on an acting capacity. The Committee is accordingly calling on the Department to finalise this matter in good time and before the commencement of the 6th Parliament. 

The Committee called on the Department to accelerate the process of creating institutional support structures i.e. Co- operatives Development Agency, Co-operatives Advisory Council, Co-operative Development Fund and Co-operatives Tribunal, including discussions with the Department of Higher Education concerning the Co-operatives Training Academy. In light of the present co-operatives mortality rate such institutional support structures are indispensable.

The Committee asked the Department to respond to the issues highlighted in the legacy report and queried the vacancies and targets set by the Department.

The Committee briefly discussed its programme and agreed to add oversight visits to enrich its work.

Meeting report

The Chairperson welcomed the Committee back after the recess. She explained that everyone had the agenda before them and it had been communicated before the meeting. She thanked staff members and anticipated that the Committee would be back on course with no delay and that with summer approaching, there should be no delays in people working. Winter was over and therefore people were expected to work.

The Chairperson stated that the Chapter 9 institutions had the mandate to work with the Committee and welcomed any representatives who were present. She also specifically wished to assure the Office of the Auditor-General of South Africa (AGSA) that the Committee would do its very best to help the Office of the AG fulfil their mandate. 

The Chairperson apologised for the venue not having any recording software, as renovations were being done to committee rooms and therefore they found themselves in a very difficult situation venue wise. The technology in the venues being used in the interim did not have access to technology and microphones which hindered the efficiency of the Committee meetings. 

Mr T Langa (EFF) wanted to know if the apology regarding the lack of audio and technology were being put on record.

The Chairperson replied that it would be put on record.

Mr Z Mbhele (DA) clarified that what Mr Langa meant, was if the meeting in itself would be on record since there were no recording equipment nor microphones.

Mr Langa concurred with Mr Mbhele’s clarification.

The Chairperson replied that fortunately the AGSA was present and the lack of technology was no reason to hinder the work of the day that needed to be done. 

Ms K Tlhomelang (ANC) stated that it was a challenge not having the meeting recorded or a venue where no technology is present. She accepted the apology but that it ought to be the last time such an incident occurred. She suggested that the meeting be continued as it was not every day that the AGSA appeared before the Committee. 

Mr H Kruger (DA) shared the same sentiments that audio recordings needed to be available for the sake of transparency and accountability. He agreed that it ought not to happen again and that adequate arrangement be made.

The Chairperson stated that if all were in agreement the Committee would then move forward.

Committee Programme

Mr L Mangcu (ANC) noted that Members had the draft programme before them and that there had been an amendment to it.

Mr Kruger stated that the Committee needed to conduct oversight visits as well to see whether things were being done properly and also if possible to attend international conventions such as the one that was hosted in Spain. He was aware that the previous Committee had found it very informative and helpful. Information sessions should not be put off till the last year in office as that would not be helpful. It would be best to gain as much knowledge while still having enough time to implement that knowledge.

The Chairperson replied that the input was noted.

Mr F Jacobs (ANC) agreed with Mr Kruger regarding the oversight visits and stated that Members needed to look at the scope of the work of the Portfolio Committee. He added that that once there was agreement, Members could put forward proposals on places to visit.

The Chairperson asked if there were any other points

Mr Kruger wanted to propose that the programme be accepted.

Mr Mangcu suggested that the Committee should concentrate on the internal aspects and finalise everything first such as the programme before the oversights took place which would likely happen in the next term.

Mr Kruger proposed that they start working on it now. The Committee should talk to the secretary and finalise everything so that next year it could go to Spain. He once again reiterated that from previous years’ experience, it was an unbelievably informative session and the information could be utilised sooner rather than later. 

Ms Tlhomelang agreed about the importance of oversight visits but pointed out that that there were both international and domestic oversights. She explained that the Committee could also do domestic oversights as many came from different constituencies and therefore could learn from various other constituencies. She proposed the acceptance of the proposal and added if possible they could shift the time to accommodate the Ministry as a Wednesday morning, the Minister and Deputy had meetings. If the Ministry was keen to be attend meetings, then why not try to accommodate them if they want to be here and part of meetings. This could become necessary when crucial matters were being dealt with. 

Mr Mangcu stated that the plan was to visit all provinces and in the past the Committee had only manage to visit 6 of the 9 provinces and therefore the North West and Northern Cape that were not visited previously, would be the starting point of the oversight visits.

The Chairperson asked if the Programme could be adopted 

Mr Jacobs suggested that since there were recommendations, Members could send their input to the support staff and the programme could be adopted later. 

The Chairperson agreed.

Briefing by Office of the Auditor-General of South Africa (AGSA) on Forensic Investigation

Ms Aletta van Tromp, Business Executive: Investigations, AGSA, explained that the entity had a constitutional mandate and as the Supreme Audit Institution (SAI) of South Africa, exists to strengthen democracy by enabling oversight, accountability and governance in the public sector through auditing, and thereby building public confidence.

Ms van Tromp provided the Committee with an update on the forensic investigation undertaken by the AGSA. 

Background
The former Director General (DG) of the Department of Small Business Development (DSBD) had expressed a concern that issues identified by the regularity audit team during the 2016/2017 audit, warranted an investigation to determine the full extent of the irregularities noted relating to two incentive schemes of the DSBD. In terms of the AGSA delegations the Auditor-General approved the request for investigation and a letter of engagement in respect of the investigation was signed on 23 March 2018 with the former DG of the department. The investigation focused on the 2015/16 and 2016/17 financial years.

The focus of the investigation included:
-Compliance of the DSBD to the guidelines and standard operating procedures (SOP) of the Black Business Supplier Development Programme (BBSDP) and Co-operative Incentive Scheme (CIS);
-The validity of the processes followed in awarding incentives to grant applicants;
-Confirmation of the authenticity of suppliers and quotations;
-Verification that goods and services were actually delivered/received; and
-Monitoring and reporting processes followed by the DSBD subsequent to the approval and payment of the incentives to the beneficiaries.

A draft management report was compiled and issued to the Accounting Officer (AO) on 22 February 2019 and discussed with the AO and Executive Authority on 28 February 2019. DSBD management provided responses on the AGSA findings and recommendations on 19 and 25 March 2019. Delays experienced during the course of the investigation were discussed with Minister Zulu during the meeting with the AGSA held on 28 February 2019. Delays experienced include, amongst others, the following:
DSBD’s IT system was offline for nearly a month. As such beneficiaries’ application files could not be provided to the investigation team.
The extension of the sample size for site visits from 30 to 60 and the subsequent additional procedures to confirm existence of grant applicants, service providers and goods purchased.

A final management report (incorporating management responses) was issued to the AO on 25 April 2019, affording management a final opportunity to respond to the findings raised. Section 29(3) of the Public Audit Act requires that a report be compiled on receipt of management comments whereafter the report will become a public document for tabling in Parliament. The AGSA was unable to share the report with the Committee prior to it being finalised and tabled in Parliament.

Black Business Supplier Development Programme (BBSDP)
During the 2015/16 financial year, 684 applications for BBSDP grant funding were approved (approximately R307 million). 597 of these were paid in the year (approximately R193 million). During 2016/17, 738 applications for BBSDP grant funding were approved (approximately R392 million). 598 of these were paid in the year (approximately R242 million). The findings were predominately due to non-adherence to the BBSDP guidelines and SOP in processing, evaluating, adjudicating and recommending grant applicants for approval of the incentive schemes. The findings also point to inadequate internal controls, monitoring and oversight in the awarding of incentives to grant applicants.

Co-operative Incentive Scheme (CIS)
The total value of approved applications for CIS grant funding for the 2015/16 financial year amounted to approximately R84,4 million, of which R74,9 million was paid. The total value of approved applications for CIS grant funding for the 2016-17 financial year amounted to approximately R65,7 million, of which R63,8 million was paid. The findings in respect of the CIS were predominately attributable to the non-adherence to the CIS guidelines and SOP in processing, evaluating, adjudicating and recommending grant applicants for approval of the incentive schemes. The findings also point to inadequate internal controls, monitoring and oversight by the DSBD in the awarding of incentives to grant applicants.

Findings 
Non–Compliance to Incentive Scheme Guidelines and Standard Operating Procedures (SOPs)
 
BBSDP guidelines and SOP contradict each other in some instances. The BBSDP guidelines and SOP have also not been adequately updated to include procedures and guidance in the event that the grant applicant has fully paid for goods and services for which grant funding was applied for, and is subsequently reimbursed by the DSBD. The BBSDP and CIS guidelines was the primary guidelines used by the DSBD for the grant/incentive programme. These guidelines were also available on the DSBD website and intranet, therefore the DSBD employees had to have been aware that they needed to comply with such. We used the BBSDP and CIS guidelines to determine compliance with regard to the awarding of grants/incentives to grant applicants. Only in instances where the guidelines contained no information on certain issues did we refer to the SOPs. During the application, approval and payment of incentives, the AO and officials did not ensure compliance to the BBSDP and CIS guidelines and SOPs in all instances. The AGSA inspected 88 application files. 37 (42%) of these contained no evidence that inspections had been performed before submission of the applications to the adjudication committee for approval, in contravention of the BBSDP guidelines. All 37 applications were approved by the adjudication committee. Eight officials were implicated in this regard.

23 out of 88 applications (26%) of the sample tested were accepted and approved despite the application amounts exceeding 30% of the applicant’s previous year turnover (according to the financial statements) or there was no evidence to substantiate the 30% previous year turnover requirement, in contravention of the BBSDP guidelines/ SOP. Four officials were implicated in this regard. 34 of the 88 (39%) application samples investigated did not contain the required documentation relating to the requirement for copies of Identity documents (IDs) of key managers, directors, shareholders and list of employees of the entity, in contravention of the guidelines. Officials submitted these applications to the adjudication committee and they were approved without the required documentation. Six officials were implicated in this regard. According to the financial statements from the sample selected, 16 out of the 88 (18%) applications did not have the financial capacity to fund 50% of the total cost of equipment applied for as their current liabilities greatly exceeded current assets. Furthermore, the diagnostic reports prepared by NFs in most instances did not indicate how the applicant’s 50% contribution will be funded. 19 out of 72 claims (26%) tested were paid without the requisite documentation. Five officials were implicated in this regard.

According to the financial statements from the sample selected, 16 out of the 88 (18%) applications did not have the financial capacity to fund 50% of the total cost of equipment applied for as their current liabilities greatly exceeded current assets. Furthermore, the diagnostic reports prepared by NFs in most instances did not indicate how the applicant’s 50% contribution will be funded. 19 out of 72 claims (26%) tested were paid without the requisite documentation. Five officials were implicated in this regard.

For 9 of the 58 (16%) applications investigated, the Trade and Industry Advisor (TIA) did not perform site visits prior to submitting applications to the adjudication committee. One official was implicated in this regard. 20 of the 58 (34%) applications investigated were processed and approved without the required documentation. Five officials were implicated in this regard. For 4 of the 58 (7%) applications investigated, the TIAs did not confirm that three quotations were submitted for each activity applied for. Three officials were implicated in this regard. For 2 of the 58 (3%) applications investigated, the lowest quotation was not accepted, without documenting reasons for not accepting the lowest quotation. Two officials were implicated in this regard. 12 of the 58 (21%) applications were approved by the adjudication committee with less than three quotations however the motivation for deviations were not approved by the AO. One official was implicated in this regard.

Validity of Awarding BBSDP Incentives 
34 grant applicants had a turnover above R1 million, however these applicants were not registered for VAT. The AGSA noted multiple instances where preferred service providers that quoted above R1 000 000 did not include VAT in their quotations. They also failed to provide their VAT registration number on their quotations. These quotations, amounting to R12 050 625 were accepted by the BDOs. One supplier was registered for VAT according to the SARS website but did not charge VAT on their invoice. The invoice was for an amount of R136 0000. During the investigation we identified that directors of multiple companies applied for and received grants exceeding the R1 million threshold. 

Authenticity of BBSDP Suppliers and Quotations 
In one instance CIPC searches indicated that the service providers who submitted quotations for tools and equipment share a common director.

False Declaration of Interest by the Grant Applicant 
One instance was noted where a member of a co-operative appears to have made a false declaration in their application submitted. The application reflected that the applicant and service provider are not connected. However CIPC searches reflected that a member of the co-operative, is also a director of the approved and paid supplier.

Verification that Goods and Services were Delivered/Received by the BBSDP Grant Applicant
The AGSA performed site visits at the premises of 50 approved grant applicants. In 32 of the 50 (64%) site visits, it was unable to locate or verify the existence of such premises and/or assets for which the grant funding was provided. DSBD paid R19 921 877 to these 32 entities. Three different grant applicants indicated the same address on application forms and the inspection report compiled by the BDO for one of these applicants confirmed the address. The AGSA investigation team visited the address and confirmed the address belongs to a homeless shelter. A total amount of R1 287 720 was paid to two of these grant applicants at the draft management report (22 February 2019). One instance was noted where a grant applicant applied for and was paid an incentive for equipment amounting to R800 000. The inspection report contained photos of a digital packing machine reflecting the serial number of the equipment. During the AGSA inspection an old analogue machine was found on site, with a serial number which corresponded to the pictures on file. However, the equipment differed. In three instances, grant applicants received incentives for weighbridges amounting to R2 400 000. The inspection reports indicated that equipment had been delivered to the applicants. The AGSA visited the premises and determined that the weighbridges belonged to other third parties and not the applicants. 

Verification that Goods and Services were Delivered/Received by the CIS Grant Applicant
The AGSA selected 10 co-operatives of the 58 sampled to physically verify whether the entities existed and if goods and services were actually delivered. Of the 10 co-operatives, it was unable to verify the existence of five of them (50%). The amount paid by DSBD to the five co-operatives amounted to R 1 692 792.

Monitoring and reporting processes followed by DSBD subsequent to the approval of the grant applicants
It was confirmed by the BBSDP Director and BBSDP Deputy Director that no post-approval site visits were conducted for the BBSDP applications approved and paid. It was also confirmed by the CIS Deputy Director that the DSBD does not conduct post investment site visits on funded co-operatives.

Possible fraudulent BBSDP claims
One instance was noted where a grant applicant submitted an extract of its bank statement to DSBD as proof that they paid the full amount of R1 504 100 on 20 November 2015 for equipment to a service provider. The AGSA however noted that the bank statement also reflected that the same amount (R1 504 100) was paid by the service provider into the grant applicant’s bank account on 20 November 2015. The net effect of the money transfer is zero. On the BBSDP claim file the BDO, indicated that the equipment was delivered. However, the AGSA could not locate the premises at the address indicated on the BBSDP inspection report. The AGSA was therefore unable to establish whether the equipment was delivered. The AGSA noted one instance where the grant applicant applied for a BBSDP grant to purchase equipment, however it noted from the available documents that the applicant possibly already had the equipment in their possession before applying for the grant. Another grant applicant procured imported machinery from a service provider based in the USA. However, the AGSA noted that the machinery differed from the photo evidence submitted with the inspection report and that the machinery was manufactured in 2010 by a Chinese based company. This suggests that the applicant possibly already owned the machinery before applying for the grant. Furthermore, there is a possible conflict of interest between the grant applicant and the service provider in that the director/member of the grant applicant and the director of the service provider appear to be spouses based on their social media profiles.

Four separate grant applicants applied for grants from DSBD during 2014 to 2016. DSBD paid grants totalling R3 118 411 to these four entities. Results from the inspection of the claim files and CIPC searches is suggestive of the possibility that the four entities are connected. The BDOs that performed the site visits relating to these claims indicated in the inspection reports that the equipment was delivered however, when the AGSA visited the address indicated on the BBSDP inspection report, there was no sign of such businesses at the indicated address. The AGSA inspected the bank statements of a grant applicant for proof of payment of 50% contribution to the service provider. However, according to the bank statement a separate government agency funded R686 250 for the equipment. According to paragraph 6.1.6 of the BBSDP guidelines entities are not eligible for funding if interventions are already funded by another government scheme. BBSDP officials did not comply with paragraph 6.1.6 of the guideline. The BDO was negligent in performing his/her duties, as the information showing the government funding was contained in the application file, which appears to have been overlooked by the BDO. Therefore the state paid for 100% of the cost of equipment amounting to R1 211 250 (approximately 50% other government agency and 50% DSBD).

Network Facilitators findings relating to BBSDP
In 34 instances (39%) the NFs did not check that the grant applicants complied with the requirements. In 16 instances (18%) it was identified that NFs did not ensure the submission of three valid competitive quotations. Fifteen instances (17%) were noted where NFs possibly made misrepresentations in diagnostic reports. Certain NFs (15 instances) and AFS preparers (5 instances) appear to be involved with possible misrepresentation of financial information contained in the Annual Financial Statements (AFS) and on the diagnostic reports. Furthermore, per the samples tested, nine NFs did not meet the criteria or did not submit the required documents to qualify to be on the approved list of NFs. Three instances were noted where the NFs received a facilitation fee of R10 550 for facilitating applications for entities they are directors of. The BBSDP guidelines are silent with regards to NFs facilitating applications on behalf of applicants in which they have a directorship. We also noted seven instances where it appears that the NFs were involved with the submission of possible fictitious quotations.

Management response to Draft Management Report 
Management has indicated that they will arrange training for all officials working with the processing of applications and claims to ensure compliance. Training interventions will comprise of the following:
Continuous refresher training to ensure that staff are updated on all new developments.
A suitable course to retrain all the TIAs has been sourced and SCM processes are in process to appoint a training provider.
The DSBD HR Unit is assisting with the process and it is envisaged that training will resume in the first quarter of the new financial year 2019/20.
Management intends to institute disciplinary action against officials for non- compliance with the BBSDP guidelines.

Management also intends to open cases of fraud against the officials, grant applicants and service providers with the South African Police Service. Management has decided to blacklist NFs that appear to have made misrepresentations in diagnostic reports and potentially colluded with officials. Furthermore, management will consider deregistering NFs that did not qualify to be registered as NFs or did not submit all required documentation.

Way Forward 
The AGSA has been assisting the legal counsel representing the DSBD in the disciplinary hearings with the drafting of the charge sheets issued to the DSBD officials in preparation for the disciplinary hearings. Disciplinary hearings have been provisionally set to be held on 12- 13 September 2019.

Discussion
Mr Kruger stated that he wished to correct the report, because it was not the DG who had asked for the investigation. The problems were picked up by the previous Committee and it had asked for an investigation. He wanted a response to this because according to his knowledge it was definitely not the DG.

Mr Jacobs wanted to know what the time frame for getting the letter signed off by the AG was and sought clarity on the process. He noted that the AGSA was in the process of drafting a report to Parliament. What was the process in this regard as well as what role Committee Members played?

Mr Jacobs wanted an explanation as to what happened after the system was off for a month, as the AGSA was unable to extract information or even use the system at all. Lastly he asked when the system would be up and running again, as well as what was being done to stop the incident from occurring again.

Mr Langa brought attention to the fact that 50% of the recipients were not located. He wanted to know why this was the case and what exactly was being done about it. 

Mr Kruger stated that there were very serious allegations against the Department and this Department was an important strategy of Government to combat poverty. Money that was meant to be used for businesses to uplift the lives of poverty stricken people landed up in Government Officials pockets. The longer the programmes, the more money was being given to the officials and landing up in their pockets. Matters going as far back as 2014/15 such as businesses not existing were still not dealt with and needed to be looked at urgently, as well as stopped now. The Department, the AG as well as the Portfolio Committee needed to make sure that money allocated for small businesses went to small businesses. He emphasised that he was making a statement and did not expect feedback.

The Chairperson shared Mr Kruger’s frustration. She commented that the AGSA was there to help the Committee eradicate corruption and was at least doing something.

Ms van Tromp responded that she was aware that the previous Committee and Department raised this issue; however if one looked at the relevant legislation, a letter was needed from the DG before anything could be done. Once the AGSA received that letter it commenced with the investigations. Concerning the tabling of the investigation report, the AGSA was not responsible for this. The AGSA submitted the report directly to the responsible Minister to table it to Parliament and this was then referred to the relevant Committee.

Ms van Tromp explained that IT system was old and came from the DTI. It was a system that went on and off and created backlogs. There were no hardcopies for the application so when the entire system is down for a month, it created a backlog. The other issue was that people were using the same application to apply to various different departments to gain capital from the government and that was a problem because applying to more than one department meant that they would get money for the exact same thing from different departments and therefore were getting more than they needed. This led to non-compliance and corruption. 

Mr H April (ANC) wanted to know if the AGSA had checked with FICA to source information on the grantees. He explained that documentation could be acquired from the banks because when opening a bank account, information is acquired by them, and therefore wanted to know if FICA had been approached and if not, why not. 

Ms van Tromp responded that in order to gain access to those records, a criminal case needed to be opened first. She added that the AGSA had pursued that path where Managers indicated that they would open a criminal case.  

The Chairperson asked what was being done to deal to fix the dysfunctionality and aging system in such a Department. 

The Chairperson stated that she was highly interested in the findings of the AGSA and wanted to hear the Department’s response to it. She really appreciated the effort by the AGSA and wanted to know how long it would take to finalise the report. 

Ms van Tromp responded that the system itself was very unreliable. It was a very old system and needed to process volumes of actions. When they started the investigation, there were multiple times when the system was offline and it was not deliberate on the part of the Department. 

Mr Lindo Kuhle, Acting DG, DSBD, explained that the system that they had was received from DTI. The challenge is that it was custom made, so the Department could not just get anyone to come and fix it. It had to approach Treasury for money to get someone to come fix it. It could not just issue a tender or quotation to get it fixed. In terms of the long term solution, the Department was moving away from the grants as it was not assisting it. The Department wanted to use one system, mainly Sefa. Currently, the Department had someone on board to manage the system for the short term period.

The Chairperson stated that she would not be taking any more points as Members had the documents present before them and that time specifications did not allow for more questions to be posed.

The Chairperson informed the Deputy  Minister that there would be a shift in the committee meeting’s time to the afternoon in order to accommodate the Ministry.

Ms Tlhomelang commented that from her observation there was non-compliance and a lot of irregularities. She proposed that the Department give clarity on the matters raised and how it would be dealing with this, along with time frames.  She made an example for inspections being done before funding and yet funding was given, how was that possible if the business was not a real one and never existed. She indicated that she was just making a proposal and did not expect feedback.  

AGSA briefing on its role and mandate 

Mr Mohamed Rehaan Ali, Senior Manager: Auditing, AGSA, explained that the AGSA must audit and report on accounts, financial statement and financial management of government institutions.

The AGSA prepared audit report containing opinion/conclusion on:
Fair presentation of the financial statements
Compliance with applicable legislation
Reported performance against predetermined objectives
Discretionary audits (including sector audits, investigations and performance audits)

The AGSA issued different types of audit Opinions. A Clean Audit means that everything was done the way it should be. An Unqualified Audit with Findings meant that it was not bad but could compromise accountability, if not already doing so. Qualified Audit means that the entity did not manage and account for finances to achieve the best results. Adverse findings means that there were a lot of problems, everywhere, and nothing was done according to the correct rules and procedures. A Disclaimer is the worst of them all and means that things were so bad that they entity couldn’t even produce reliable evidence to support their financial statements. 

The AGSA presented a picture of the audit outcomes over the past 10 years for national, provincial government and local government. 3% of national and provincial departments received disclaimers with findings in 2016/17 and 2017/18. The figure was 11% and 10% for local government over the same period.

The presentation included a summary on the history of irregular expenditure, fruitless and wasteless expenditure and unauthorised expenditure over the past decade.

The root causes of continued poor outcomes included:
Blatant disregard for controls, compliance with legislation and AGSA recommendations
Continued capacity gap in administration
Vacancies and instability slow down systematic and disciplined improvements
Unethical behaviour in administration and by political leaders
Leadership’s inaction / inconsistent action to addressing persistent transgression creates culture of ‘no consequences’

The AGSA contributed to the oversight work done by the Legislatures. The AGSA held briefings with the oversight bodies on the annual performance plans and assess the implimentability of annual targets. It shared the audit outcomes annually and provides progress updates of current year audits. The AGSA attends and provide briefings (clarity) during public hearings and oversight visits, conducts road shows after each audit cycle (PFMA and MFMA) and shares performance audit outcomes when its due. The AGSA shares insights on root cause of audit outcomes and recommendations on corrective actions needed for improvement and sustainable outcomes through briefings to the committees.

The Public Audit Amendment (PAA) Act expanded the mandate of the AGSA. Accounting officers and authorities have a legal obligation to prevent all irregularities and take action if it occurred. The AGSA’s focus is only on material irregularities. Committees can use the information in the audit report on material irregularities for accountability and oversight purposes, insisting on timeous implementation of recommendation. It can also use reports tabled on progress with material irregularities to oversee and influence progress made by public bodies with investigations and executive authorities (for recovery of debt)

Discussion
The Chairperson stated that she really appreciated the presentation.

Mr Mbhele stated that his question may have been answered already as he had stepped for a bit but with reference to slides 9 and 10, he noticed that there was a spike in the outstanding audits from 2017/18. Why was that the case as to him it seemed to be a noticeable trend? He further noted that one missing element in the presentation was the comprehensive risk assurance model that the AG always tabled with Committees. 

Mr April noted a high spike in the history of fruitful and wasteful expenditure, as well as the auditing between 2009/10 – 2012/13 and wanted to know the reasoning behind it. He referred to the scandals plaguing KPMG, and wanted to know whether the AGSA audited private audit firms.  Since the scandals, had the AGSA audited external auditing firms?

Mr Ali responded that the AGSA would present on the comprehensive risk assurance model when it returned to the Committee. On the outstanding audit spikes, he explained that the AGSA had recently started auditing schedule 2 Entities such as Denel and South African Airways and at the time of the compiling of the reports, those audits were not yet finalised. Secondly, he explained that at a certain time during the year, the AGSA stopped audits in order to compile its General Reports. 


He further explained that the AGSA did not necessarily audit private entities. He re-iterated that the AGSA had recently starting auditing schedule 2 entities once again. Where departments where audited externally, the AGSA could not interfere in the auditing process. However; on oversight, the AGSA made sure that it advised Audit Committees on what needed to be focused on.


Committee Legacy Report 

Mr Sibusiso Gumede, Committee Content Advisor, briefed Members on the activities of the Committee during the Fifth Parliament.

In fulfilling its mandate, the Committee based its work on its Strategic Plan 2014 – 2019. The strategic plan took into consideration priorities of the government and the strategic objectives of the Department. 

During this period, the Committee processed two bills.  Other activities of the Committee included oversight visits where various projects and programmes financially supported by the Department and entities wear visited in Gauteng, KwaZulu Natal, Mpumalanga, Eastern Cape, Limpopo and Free State. Furthermore, the Committee conducted a study tour to Mondragon and Madrid in Spain. The Committee carried out extensive stakeholder engagement with numerous small enterprise representatives, big business and heard expert testimonies from time to time by inviting experts in areas to present to the Committee as and when necessary.

During this period, the Portfolio Committee progressively flagged the operational risk as a consequent of high vacancy rate particularly at senior management level. Accordingly, the relentless underspending and failure to achieve some of the crucial milestones i.e. tabling of the Small Enterprise Bill among others were often attributed to vacant posts and lack of capacity. Throughout the 5th Parliament as evidenced by its recommendations the Committee held a view that the fundamental challenge antagonising the Department has been its inability to produce a corresponding organisational structure embedded into its strategic plan. Consequently, DSBD has produced and presented to the Committee three different strategic plans. The last strategic plan and organisational structure, approved by the Minister in 2017, was subsequently submitted to the Department of Public Service Administration (DPSA) for concurrence. However, there has been back and forth with no finality on the matter. In terms of the Public Service Regulations, the Minister of Public Service Administration must approve organisational structure of a national department. The Portfolio Committee observed and recommended during its 2015, 2016, 2017 and 2018 Budget Vote and Budget Review and Recommendation Report (BRRR) processes that the organisational structure must be given priority. At the time of concluding the legacy report, beside the position of a Deputy Director General - Enterprise Development and Entrepreneurship, all other top management positions, including that of the Accounting Officer, were on an acting capacity. The Committee is accordingly calling on the Department to finalise this matter in good time and before the commencement of the 6th Parliament. 

The Committee called on the Department to accelerate the process of creating institutional support structures i.e. Co- operatives Development Agency, Co-operatives Advisory Council, Co-operative Development Fund and Co-operatives Tribunal, including discussions with the Department of Higher Education concerning the Co-operatives Training Academy.
The Committee believed that the Department must continue to exist. Empirical evidence suggested that no economy can exist without the small business sector. The National Development Plan situates more accountability on the sector to create 11 million jobs, which is a further indication that the challenge of tackling unemployment will come from a vibrant small enterprise sector. Based on the Committee experience, the establishment of the Department was absolutely necessary, and it must therefore remain in order to fulfil what it had intended to accomplish.

Discussion
Mr Kruger thought that the Committee had recommended that SEFA and SEDA be integrated into one entity, as it would ease access for consumers and was a waste to have two agencies. He highlighted that efficiency would be better if they were integrated. 

The Chairperson asked the Department to respond because the legacy report dealt mainly with the past and what was in the pipeline. The Department should be given a reason to respond in order to know what issues they foresaw and what they dealt with so that if any issues came up in future then the Committee would be in a better placed position. 

Ms Rosemary Capa, Deputy Minister of Small Business Development, stated that the purpose of the legacy report was to provide Members of the Portfolio Committee with an understanding of what took place during the 5th Parliament. When new management kicked in for the 6th Parliament, it was for the new management to implement what was in its manifesto. In so far as the restructuring of the departments, it’s an area reserved for the ruling for party that won elections, and had a new mandate. 

Deputy Minister Capa explained that the Legacy report came after many reports had been presented. The report stated that nothing had been done to address some of the issues, however, it should be noted that, SEFAs board was reduced by 3 months. Its term was reduced because of the very challenges that were mentioned. The Chairperson of SEFA resigned.  A new Chairperson, as well as CEO reported to the Committee on the issues that the legacy report contained in them as not being dealt with. 

On the recommendations, she noted that they were not binding; however they were serious and the Department had to treat them as if it were binding.

Deputy Minister Capa explained that the number of Departments had been reduced and as such many functions were assigned to other Departments. A new approach had been adopted in Cabinet. Many Departments with similar functions sat together as Committee before Cabinet approved anything. 

Deputy Minister Capa emphasised that the Department’s focus was on small businesses. Further, the Department identified cooperatives at a lower level, registered them and distributed what was due to them. She advised the Committee to re-look at the recommendations and check if it would still be helpful. She assured the Committee that whilst the officials implicated in criminal matters had not been mentioned, they were being dealt with. She explained that the strategic plan and budget needed to be reviewed in order to align to the mandate of the Department. 

The Chairperson stated that the forensic investigation and the legacy report were important matters. The legacy report flagged what needed to be dealt with, along with gaps that needed to be filled. The issue of SEDA and SEFA, was one that the Committee wanted the Department to note.

The Chairperson highlighted that an organogram would be useful because, with the influx of officials from other Departments, it would help to know where everyone fell. A better relationship between the Department and the Committee was needed in order to guide the Department.

The Chairperson stated that she was satisfied with the forensic report but would have liked to see an organogram, funding model and other issues being outlined. 

Mr Jacobs asked the Department to explain its plans and response to the Legacy report as it was not the first time the Department had seen it. The legacy report stated what had happened in the 5th administration and the Department needed to build on it to improve on its performance. Some of the things mentioned in the report needed to be incorporated and therefore the Committee needed an update. If the Department was not able to answer the question then it needed to be accepted however, it should be able to state was being done in the interim. 

Mr Jacobs explained that the vacancies in the Department affected its mandate to build jobs and create an entrepreneurial state. The Department could not be limping if it needed to meet massive targets, instead it needed to be gearing up and know what its approach would be. The Department could not make targets in its budget speech votes and then in the following year state that it never met it due to capacity issues. Legislation provided that there must be an advisory body. He asked the Department to take the Committee into its confidence on its plans regarding that. He commended the Department on the registry reflecting the yellow pages concept and stated that it was a beautiful concept, however, once again it responded to one of the issues the Committee raised. On the intermediaries, these needed to be cut as they were expensive and served no genuine purpose of input. Lastly, he wanted to know if a company such as Eskom was recouping millions of rand from the Gupta’s, why could the Department not recoup from the CEO’s of the companies they dealt with. 

Deputy Minister Capa stated that if the Committee needed specifics, then the Acting DG would answer the issues raised as best he could. 

The Chairperson stated that due to medical reasons, she had to leave as she had been hospitalised a few weeks before the meeting and therefore needed to see the doctor once again. 

Deputy Minister Capa stated that simply putting more structures with no structural review, would lead to an abundance of structures and paying more bodies. 

On the structures, Mr Kuhle highlighted that the Minister spoke about it in her budget vote and that it would be done and submitted to DBSA (Development Bank of Southern Africa) by October because the Department considered it a priority for the 6th administration. 

The National Small Business Enterprise Act is in the Annual Performance Plan (APP) and the Bill draft would be ready by end of March 2020. On the APP, matters relating to informal businesses was a big because Municipalities were not enforcing by-laws. Whilst there were a number of issues, it was being addressed with Municipalities as well as CoGTA to manage the situation, as the Department did not wish to fall into the same trap the 5thadministration found themselves in. 

Mr Kuhle explained that the Act needed to be amended as it was created when the Department had a budget to support the structures it had. However, now that it did not an amendment and restructuring needed to take place. There were initiatives being worked on to address the issues of cooperatives and ones that were failing. On the master plan, the Department had a strategy for the cooperatives in place. The issue of the advisory board was dealt with in the Minister’s Budget Vote Speech and the manner in which it would be dealt with, as Treasury could not assist in that aspect. The Department was not only taking a short term view but a sustainable long term view as well on how to deal with issues going forward. Lastly, he assured the Committee that discussions were taking place between the Department and Treasury regarding the fulfilling of the mandate. 

Mr Jacobs, on behalf of the Chairperson, thanked the Committee, the Deputy Minister, the delegation and everyone else for their attendance. 

The meeting was adjourned.

 

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