Audit outcomes of Departments: AGSA briefing; DTI & EDD 2018/19 Annual Reports & 2019/20 & Quarter 1 performance; with Deputy Minister

Meeting report

The Chairperson welcomed everyone to the meeting.

The Committee Secretary read the agenda as it had not been printed. He asked Members to complete a questionnaire from the Auditor-General South Africa (AGSA). He offered apologies from Mr M Cuthbert (DA) who was attending a World Trade Organisation conference.

The Chairperson welcomed AGSA and everyone at the meeting.

Presentation by the Auditor-General South Africa

Ms Mabatho Sedikela, Corporate Executive at AGSA, introduced the team. Ms Sedikela was accompanied by Mr Tshepo Shabangu, Senior Manager at AGSA, who made the presentation as he was responsible for the audit of the Department of Trade and Industry (dti) and Economic Development Department (EDD) portfolios. Also in her team was Ms Mokgadi Muthadi, Senior Manager responsible for the audit of the South African Bureau of Standards (SABS), Ms Morongwa Mashigo, Senior Audit Manager responsible for the National Regulator for Compliance Standards (NRCS) and Mr Sizwe Nxumalo, Audit Manager responsible for the dti and EDD audits.

Mr Shabangu informed the Committee that there were no audits outstanding for the dti, the EDD or their entities. SABS had in the past five years moved from a disclaimer to a qualified audit. The NRCS also had a qualified audit. All other departments and entities in the portfolio that had been audited by AGSA had received a clean audit and there was no regression in the audit. As a whole, the portfolio had moved from 26% clean audits in 2014/15 to 86% clean audits in 2018/19. That was the result of the guidance of good leadership.

SABS

Ms Muthadi stated that SABS had previously had a disclaimer because it was not, at the time, a going concern. SABS Commercial had been established to generate revenue but there was insufficient capacity in the unit to generate revenue. There was a material uncertainty in that there was not enough funding and not enough secured revenue for the testing services and there was not enough evidence to show continued support. In 2017/18, there had been an intervention by dti but the infrastructure was aging, and revenue had declined because of the loss of custom following the stopping of partial testing.

In 2018/19 the turnaround began and the grant was shared between the two mandates but the financial accounting had led to the qualification. At SABS Commercial, there was not enough control to ensure that all testing was accounted for and income secured. One of the problems with testing by SABS was the need to focus the revenue in the year in which it was paid. Contracts were running over two years but revenue had not been split between the two years. Irregular expenditure was the result of inefficiencies in respect of control measures to detect irregular expenditure. The managing of contracts was a problem and the SABS had overspent on a contract which became irregular expenditure. Deviations either were not approved or should not have been approved.

Qualifications on two types of revenue had spilled over into the performance targets because revenue had been used to establish performance targets. Because the financial statements were problematic, performance could not always be reflected accurately.

NRCS

Ms Mashigo informed the Committee that NRCS had received a qualified audit for the past five years. There had been no progress, even though the AG had attempted to assist the entity. One of the concerns was that the NRCS was unable to recognise customers who had to pay levies and to record them in the correct financial period. The position of Financial Manager had been vacant for more than 12 months. The positions of Senior Manager for Human Resources and Supply Chain Manager were also vacant. Vacancies in key positions had a negative impact on performance. There had been an inadequate recording of numbers in the financial statement and NRCS had relied on consultants to draw up the financial statements. The AG had received a tip-off on fraudulent activity during the audit. The date for completion of the audit should have been 31 July 2019 but AGSA had to move the completion date in order to address the allegations of fraud. AG had informed the oversight structures, i.e. the Minister of Trade and Industry, the CEO and the internal audit committee. Nothing had come out of the allegations, but the opinion had remained qualified.

Mr Shabangu stated that except for the two entities, the portfolio was doing well. The key root causes for the two qualified audits was the slow response in addressing the issues raised. A lot of work still had to be done. The NRCS was problematic as there had been no response to the AG’s concerns. The entity had not moved for five years and there had been no attempt to address issues. Filling vacancies in key positions was critical. The Chief Information Officer (CIO) position was also vacant. Until those posts were filled, there would not be progress.

He added that SABS was still operating with administrators but if the top positions in SABS were filled, they could play a role in ensuring accountability. The fact that there had been no consequence management was a major cause of the audit outcome. Prescripts were not followed in preparing financial statements and the performance report resulting in a number of misstatements due to the slow response to audit findings and the inadequate implementation of action plans. Overall, processes of compliance with supply chain management requirements were not adequate as there had been overspending on certain contracts. The internal audit was not well capacitated as the chief audit executive was only appointed in March 2019.

The Chairperson noted the increase in green on the slide showing audit results but added that there had been some red in the previous year and that had to be borne in mind. That slide gave a sense of where the portfolio was in terms of audit outcomes. The slide appeared perfectly clear to him.

Mr Shabangu continued the briefing, stating that fruitless and wasteful expenditure had decreased over the past two years and in 2018/19, it had been only R200 000, the bulk of which had come from the Economic Development Department (EDD). In the EDD, a bonus had been paid to a person who was not eligible for the bonus. Other reasons for fruitless and wasteful expenditure had been penalties for late payment by SABS. The NRCS had incurred R2 100 in fruitless and wasteful expenditure. All cases of fruitless and wasteful expenditure had been properly investigated.

Mr Shabangu noted the key drivers of internal control that had to be addressed. He moved on to irregular expenditure, which had occurred largely in the procurement of goods. There had been a reduction in irregular expenditure from R134 million in 2017/18 to R72 million in 2018/19. All irregular expenditure within the portfolio had been investigated.

Recommendations to Portfolio Committee and to the departments and their entities were as follows:

Portfolio Committee:

-Request management to provide feedback on the implementation and progress of the action plans to address poor audit outcomes during quarterly reporting at SABS and NRCS.

-Request feedback on the progress of filling current vacancies for key positions at NRCS.

-Follow up on implementation of consequence management by obtaining a status update on the actions taken against transgressors at NRCS.

The Departments and entities:

-Vacant posts should be filled to enable quick response in addressing internal control weaknesses identified (NRCS).

-Continue implementing and monitoring the audit action plans on a regular basis by the accounting authority to address audit findings (SABS).

-Audit action plan should be properly designed, implemented and monitored on a regular basis by the accounting authority to address audit findings (NRCS).

-Provide continuous feedback on current investigations instituted by the entity to all oversight structures and implement recommendations to effect consequence management (NRCS).

Ms Sedikela briefly alluded to the key expansion of the mandate of AGSA. The legislation sought to complement the existing requirements of the Public Financial Management Act (PFMA). She was adamant that if everyone adhered to the legislation, there would be no need to issue certificates of debt. AGSA was encouraged by the performance of the portfolio under discussion. She recommended that management attended to the issues raised to maintain the good results. The portfolio was moving in the right direction. She added that AGSA would continue to engage with SABS and NRCS throughout the year.

The Chairperson, noting the illustrations in the presentation, complimented the presenters on the “road worthiness” of the presentation.

Discussion

Mr F Mulder (FF+) asked about the terms about underspending, overspending, irregular expenditure and the vacancy rate, etc. Who had appointed the people who were not performing and had there been consequences for those people? What was the vacancy rate in critical positions in the Department? Was the necessary expertise available to overcome the challenge? Someone had appointed or not appointed the necessary people and that had to be addressed.

Mr W Thring (ACDP) thanked AGSA for the insightful report. While there had been some improvements over the years, there were some concerns and one could never accept mediocrity. SABS had moved from a disclaimer to a qualified audit report with findings but that was like jumping out of the frying pan at 120 degrees into the fire at 60 degrees, and the outcome was still the same: one still got cooked. Unless those who had been appointed to deal with the issues at SABS did just that. There was nothing to clap hands about. There were serious concerns with SABS. The lady who had spoken on the NRCS had said that AGSA had engaged in a process in an attempt to turn the entity around but nothing had come of the process that had been put in place. Why was that? AGSA now had teeth and an expanded mandate. Currently,16 auditees were being looked at in terms of that mandate. Why was the NRCS, and such entities, not included in that group?

Ms Y Yako (EFF) stated that AGSA was doing repetitive work and nothing had changed because there was no consequence management. The departments [entities] did not change because there was no consequence management. She wanted to see a breakdown of each one of the entities in a separate picture so she could see the breakdown of each entity. With regards to fruitless and wasteful expenditure in EDD, she asked what had been done to ensure that it would not happen again. How often did AGSA do oversight during the year? What did they recommend that the Portfolio Committee as law enforcers should do in order to assist with keeping a check on the entity? Which departments were not showing movement?

Ms P Mantashe (ANC) appreciated the presentation as AGSA was the compass for the Committee. She noted that AGSA had not been specific on the fraud allegations at NRCS. What type of fraud was it? What had gone wrong? The Committee needed to know the specifics to perform its oversight role. The rest of her questions were relevant to the Departments.

Ms N Motaung (ANC) applauded the Department on the improvement in the majority of instances. She had heard the lady from NRCS [Ms Mashigo from AGSA] saying that NRCS had appointed consultants to do the financials. Was there any improvement in the quality of the financial statements after the hiring of the consultants? The issue of vacant positions – was there any progress in filling the positions? She asked the AGSA if there was there a programme or monitoring work that could be done to assist NRCS and SABS?

Mr S Mbuyane (ANC) welcomed the presentation and applauded the improvement but there was no improvement in SABS. Was the Department [entity] still intact? The last time that the SABS reported to the Committee, the Status of Records Review (SORR) and the ICT system were not functional and the infrastructure development was urgent as they were working in ageing infrastructure. Who could assist the entity with infrastructure and ICT? Could dti assist them?

He added that the fact that there was no proper record keeping of leave. That was worrying. He had signed an attendance register and it was worrying that the employees had not. He said that the Committee would follow up as suggested by AGSA, especially in terms of the vacancies as everyone was acting in the NRCS. He was not sure if the laboratory was still functional as it was ageing. It was also necessary to check whether there were any consequences or not? After five years, there had to be consequences.

The Chairperson said that the Committee had to manage the transition (of the new Committee in the Sixth Parliament). Members were picking up on issues that were not part of the issues raised in the present meeting. But when one looked through the slides, one saw that the AG had picked up on key reflections to assist new Members. The Committee needed to work with the AG to have a sense of what the Committee needed to do. If an issue had been raised in the Committee, Members could follow up if things were not going well. Slides 10 and 11 isolated a few entities and he would like to know how they were doing and what was way forward on those matters. Slides 21 and 22 highlighted key areas. He saw that it did show that there had been an improvement over five years. It was a good thing was that reported issues had been investigated. It was useful to see the improvement. There were two entities reflected there that the Committee might have to start saying what it should do when engaging with those entities to ensure that something happened and that implementation took place.

Response by AGSA

NRCS

Ms Mashigo indicated that she would answer the questions as she had been the senior audit manager on that audit. The main concern seemed to be the vacancy rate in senior management at NRCS that was at 20%, which was double the acceptable rate in government departments. The problem lay in key management positions being vacant. In addition, close to year end, the CIO position had become vacant.

With regards to the appointment of consultants, she explained that AGSA had not appointed the consultants. They were appointed by the NRCS for two cycles because of the vacancy in the Financial Manager position. Usually it was the Finance Manager who prepared the statements that were reviewed by the CFO and the CEO but that layer of preparation had not been there. That was why the entity needed consultants to prepare the statement. There was a regression in terms of the qualifications. The implementation of the finance plan and the methodology in trying to move from a qualification had not worked as it should have because NRCS had not correctly estimated the number of customers that should be billed and could not provide the thinking process for billing that number of customers. NRCS had not included new customers in the revenue and had not included administrative penalties for those that paid late. There were over ten fraud allegations. She could not give full details but they were in the range of payroll and IT management. Some were linked to weaknesses around the IT system which had not been updated and which had led to some weaknesses in the ledger.

During the audit, the entity had submitted the final statements in time on 31 May 2019. Initially, there were no amounts for employee benefits as payroll had not submitted the figures in time but even when they were submitted, the schedules were incomplete and those records could not support the financial statements.

The Chairperson noted that SABS and NRCS were the two entities that had challenges but there was consistency in NRCS being completely out from the norm in the portfolio. The 20% vacancy rate was not normal. He had looked at slide 9 was thinking that there should have been an intervention in 2014. He was not sure what the leading challenges were in terms of getting changes there. He did not know whether there had ever been any process put in place to take corrective measures. It would be helpful if AGSA could comment on that. The other one was the SABS. The same logic should be applied in trying to see where SABS was at. In some areas it seemed to be getting better, but in other areas, it was completely out because it was just on the red light. Those were the two glaring problem areas and he was hoping that the presenters could give a sense of what had been discussed at various points and what interventions had been proposed and why they had not turned the two around.

He said that the Committee was sitting with the same problem as in previous years. The SABS was more complicated to understand because one did not know how they could jump up and down but the NRCS seemed to have permanent problems and he wanted to know what had been missed in the previous years in that no interventions had taken place. It was just a general comment that he wanted to raise. He would like a comment on that and then the AG could continue responding to the Members’ questions.

Ms Sedikela explained that one of the slides showed how AGSA was different from private sector audits as it audited an entity and then continued to engage with management at repeated intervals. How often did the AGSA get close enough? Usually the AG returned to departments and entities in October or November because by then the management would have some idea of what was wrong, would have confirmed the audit and would have put together an action plan. AGSA gave root causes in the audit report so that the departments and entities could understand where the failures originated. They might be systemic failures, etc. AGSA gave recommendations and it was the obligation of the department or entity to take the recommendations and develop an action plan which was monitored. AGSA would come in and indicate if there had been any progress. There had been inertia in NRCS. Despite audits, recommendations, etc., there had been no progress. The management team had to account to the Committee on what was preventing them from doing their job.

Ms Sedikela referred the Committee to the Action Wheel in slide 8. The responsibilities of the Accounting Officer was to see to the basics according to legislation. She referred to the NRCS financial statements. The basics of reconciliations had to be done by the staff in finance, and, even if there was no Financial Manager, controls should be in place to ensure that it happened. Right at the end consultants were being paid to render services that people had been paid to do. There should not be a deterioration after the entity had spent that money. Over five years, the same issues had arisen, and were getting worse. Payroll had been an ongoing issue that still had not been addressed. She was worried about management not taking responsibility or the audit being taken seriously and there were no consequences in the entity for what was wrong. Even those who had been doing the right thing would now recognise a culture that condoned inertia. The AG had had a management meeting about the 80% of the payroll that could not be audited and thus audit procedures were limited. One of the fraud issues had also related to that area.

She added that the nature of an audit was that it was not designed to conclude on fraud comprehensively. AGSA had consequently reported to the Department and the Minister and AGSA would ask the Department and the Minister what action had been taken to address the fraud issues. There was need for firm action at the top to set the tone for the entire NRCS. She agreed that there were gaps and people were not attending to things with requisite discipline and that there was no accountability which created a culture of complacency. In the current year, there had been a significant increase in areas of non-compliance. NRCS needed to be addressed by dealing with the lack of accountability.

SABS

Ms Sedikela explained that in relation to SABS, there had been slippages but the entity had an action plan and it was on the right path. SABS needed to manage its action plan and ensure constant monitoring.

Ms Muthadi responded to questions on SABS. She agreed that there were a lot of fluctuations but, as the Committee would know, the big dip in 2017/18 had been a problem of the whole administration which, as she was sure the Committee knew, meant that the board had been dismissed and two people had replaced the board. The focus had been on turning around the operation, which was understandable because of the issues that were there and the focus had been on getting the laboratories right and getting customers. Nevertheless, the reporting function was an issue and the information had to be collated in a certain format for the Annual Report. The reporting framework had been changed from Generally Accepted Accounting Principles (GAAP) to Generally Recognised Accounting Practice (GRAP). SABS had stabilised. At the SABS, the missing link was the board level oversight of the financial reporting issues as the CFO had other things to address so, other than the audit committee, there was a gap at the top.

Ms Muthadi said that the movement from a disclaimer to a qualified audit was good. It had restored customer confidence, etc. The problem was when SABS focused on a certain area, such as operations, then the compliance side lagged behind. The turnaround strategy and the audit action plan was good and the Administrators engaged regularly with the audit committee. SABS engaged with the technical issues, especially the relationship between SABS and SABS Commercial where there were things such as loans, etc. which had not taken into account market-related issues. In the government sector it was difficult to report on such matters but there were now mechanisms in place in the government financial sector.

She added that there had been compliance with the PFMA. The next status of records review would show whether there had been improvements. The supply chain management issues related to contract management. The problem was that the contracts were managed manually so it was not possible to check when a contract expenditure had expired. SABS now had a specific unit for contracts and would try to manage the irregular expenditure. The laboratories were there and continued to function. There was an indicator to measure how operational the laboratories were and whether laboratories were covering costs. The aging infrastructure was being managed. The Department could tell the Committee about that as dti had a plan. The AG had highlighted to the Minister and management the need to ensure the urgency of getting the correct infrastructure, but there were measures underway.  Dti could expand on the issue.

Mr Mbuyane commented that the laboratories should be long gone.

The Chairperson asked the AG’s Office to continue.

AGSA Response

Mr Shabangu stated that some questions should be addressed to dti and some points made by Members were statements and not questions. It was not his place to respond to the Member’s comment regarding mediocrity. In respect of the fruitless and wasteful expenditure at EDD, the affected person had been dismissed but the money had not yet been recovered.

Ms Sedikela explained why the NRCS and SABS had not been caught up in the net of the expanded mandate of AGSA. The new mandate of AGSA would be implemented using a phased-in approach. There had to be coverage across the country when the first auditees were subjected to the new legislative requirements. Secondly, the auditees had to have a history of poor audit outcomes and thirdly, it was about the quantum of the expenditure. On the third point, those two entities had not featured. The 16 auditees selected were the biggest culprits in the country. Those two entities that Mr Cuthbert had mentioned did not have large expenditure.

She added that AGSA was currently auditing the Municipal Financial Act and they would probably find other auditees in that group who needed attention. She reminded Members that the measures were intended to be deterrents.

Mr Lionel October, Director General of the Department of Trade and Industry informed the Committee that there were 13 entities under dti and three under EDD. Ten years ago all of the entities under dti were in the same position as SABS and NRCS. Ten entities now had clean audits. In those two entities with a qualified audit, the problem had been that both the board and the top management team had been negligent. Over a year and a half, the board had been removed from SABS and the CEO and Deputy CEO of NRCS had also been removed. SABS had been placed under administration with three people seconded from dti. Mr Garth Strachan, DDG at dti, had been seconded to SABS as CEO. There had been some progress. There had been a similar problem with NRCS but there only the CEO had been replaced. However, the report suggested that the problem was much deeper and more staff would have to be replaced with secondments from dti.

Mr October informed the Committee that he, as a DG, had no legal right because dti was a department and he as an Accounting Officer for the Department had no authority to impose conditions on the entities. The entities were of equal status. It needed the authority of a Minister to manage the situation but luckily, dti had had a strong Minister who had been willing to assist. He would need to approach the new Minister for the powers to address the matter. Although he had thought that the new CEO was getting the situation under control, it seemed he would have to second staff to the NRCS.

The Chairperson noted that was the introduction of the next presentation. He invited closing comments.

Mr Shabangu said that he had said enough.

The Chairperson thanked AGSA.

After the break, the Chairperson welcomed the Deputy Minister of Trade, Industry and Competition, Ms Nomalungelo Gina. He noted the apology from the Minister. He stated that there were certain issues that had to be attended to. The issues had been highlighted by the AGSA and he hoped that the Director-General of the dti would be able to respond to on the following day because it would be helpful to interact with the slides by AGSA.

The DG of Trade and Industry introduced his team: Acting Group Chief Operating Officer, Ms Ntombi Matomela, Mr Stephen Hanival Chief Economist, Ms Susan Mangole, COO Industrial Development Division and the CFO, Mr Shabeer Khan.

Remarks by the Deputy Minister

The Deputy Minister stated that it was a pleasure to be at the meeting, although she was there to account. The DG would respond to the AG’s report but the Ministry was happy with the Departments although it was acknowledged that there were problems with SABS and NRCS. The Ministry had sat down with the dti and acknowledged that that there had to be a turn-around and that there should be consequence management in the entities. The Ministry was not happy with the performance.

The Deputy Minister was there to table two Departmental Reports. She was happy with the progress in terms of the merger of the two Departments. The plan had been presented to the Minister and she was confident that by April the following year, the two Departments would be merged. The DG was currently working with the Department of Public Service and Administration (DPSA) and soon the plan would be with the President.

The Deputy Minister acknowledged the challenges that the country faced. Government was aware of the challenges but dti had some solid plans to address the challenges and ensure that they would be managed. The trade wars that other people were looking at affected the Department directly and, in fact, the entire country was affected by the trade wars between USA and China. SA was a third party in that trade war. The Department had to be aware that it was part of the global economy. Recently, there had been an engagement with the European Union and she was glad that SA had been able to resolve the trade question with the UK. However, one could see that Germany was in the doldrums and that would affect SA. The Department was working hard at unblocking issues that could impact negatively on the country.

Unemployment was at its worst ever. Nevertheless, dti would report on the number of new jobs created. The Department would look at the matching of skills to jobs. The Deputy Minister asked whether SA could protect its domestic products against countries like China and Brazil when playing a role in BRICS. That was a question to be considered.

She added that the Department needed the insight of the Committee. The Department really needed the injection of the Members’ views. There were industries under distress, such as the poultry industry and the sugar industry, but there were master plans to address those issues. Those plans would be presented to the Committee. She was saying that there was much to do. She handed over to DG October.

The Chairperson asked the Deputy Minister to introduce the entire team.

Mr Monde Tom introduced himself as the DG of the Economic Development Department. He was with the CFO Ms Irene Ramotola, Chief Director: Policy Mr Mohammed Vawda, Chief Director: Strategy Dr Molefe Pule, and researcher, Mr Len Verwey.

Presentation by dti on the 2018/19 Report

Mr Lionel October, Director-General, dti, made the presentation on behalf of the dti.

Mr October explained that until 31 March 2020, de jure each Accounting Officer had to be responsible for his own budget.

Global growth remained subdued and the forecast in July 2019 was revised 0.1 percentage point lower than it had been in April 2019. Risks to the forecast were mainly to the downside and included:

- further increased tariffs on certain Chinese imports by US;

- threat to global technology supply chains by the prospect of US sanctions;

- rising geopolitical tensions roiling energy prices;

- Brexit uncertainty weighing on EU growth; and

- erosion of business and consumer confidence was contributing to the downside risk.

The weakness of the South African economy in the opening quarter of the 2018/19 year had been much worse than anticipated. However, that had been reversed when the economy avoided a recession and had grown by 3.1% in the second quarter. The major drivers behind the rebound in growth included the Mining sector (14.4%); Finance (4.1%); Trade (3.9%) and Manufacturing (2.1%). Sectors that recorded declines included Agriculture (-4.2%); Construction (-1.6%) and Transport (-0.3%).

The number of employed persons in South Africa increased by 21 000, from 16.29 to 16.31 million (quarter-on-quarter) in 2019 Quarter 2 but the rate of unemployment worsened to reach 29%. Jobs increased in trade, services, construction and manufacturing. SA recorded a trade deficit with the rest of the world in Q1 of 2019. Exports to Africa decreased by R15 billion to reach R77 billion in Q1 of 2019. Despite the decline in exports, the trade balance with the rest of Africa remained positive at R45 billion in Q1 of 2019. South Africa’s trade response has been remarkable since joining the group. At the country level within BRICS, SA recorded a huge trade deficit with China (-R26 billion), followed by Brazil (-R1.9 billion) and Russia (-R500 million). The only trade surplus with BRIC was with India at R649 million.

The Department had spent 99.6% of its allocated budget of R9.5 billion. The spending pattern should be considered in the context of the Departmental cost drivers, comprising of 66.55% transferred to beneficiaries across the various incentive scheme programmes, 15.41% to other transfer payments, and the remaining 17.85% was utilised for operational expenditure.

Dti had 1 300 staff and a budget of R9.5 billion. 54% of senior management positions were occupied by women, people with disabilities were at 3.8% and invoices were paid within 15 days.

The dti had achieved a financially unqualified audit opinion with no findings. The Department's 2018/2019 financial statements were free from material misstatements and there were no material findings reported on performance objectives or non-compliance with legislation. 10 dti entities had received clean reports but two entities were still to be fixed: SABS and NRCS

2019/20 First Quarter Report - dti

The DG stated that dti was committed to deepening localization but also bringing in black industrialization.

Ease of doing business was a key presidential priority and the President had signed the legislation to introduce an electronic deeds system. In the Electro-Technical field, Defy had committed to investing R1 billion in the next five years, which was a critical vote of confidence in the SA economy. In the sphere of plastics, Volkswagen Group South Africa had invested R70.9-million towards the development of black-owned component suppliers and one of the funded companies would produce plastic automotive components. Johnson and Johnson had signed an MoU to enhance the synthesis pathway for the manufacture of the Active Pharmaceutical Ingredient (API) to treat Multi-Drug Resistant Tuberculosis, opening up the opportunity for further collaborative projects.

The dti had leveraged R18.06 billion of investment, with R9.1 billion towards Industrial Infrastructure and R43.93 million towards Innovation/Technology Development. Export sales of R1.282 billion had been recorded against a target of R1.1 billion.

At the end of the first quarter of the 2019/20 financial year, expenditure was R2.5 billion compared with the actual drawings of R2.7 billion or 93.6 per cent. When compared with the same period of the 2018/19 financial year, expenditure was at 81.4 per cent. In line with prior year’s expenditure trends, spending on the incentive programmes was lower at the beginning of the financial year and would improve as the year progressed.

Presentation by Economic Development Department on the 2018/19 Report

Introduction by the Deputy Minister

The Deputy Minister informed the Committee that the presentations from EDD had been reprinted. While the content was the same, page numbers and the flow had been changed and so the document had been reprinted. It would be more coherent in the current format but the Members could use their notes on the original documents. It also made it easier for the senior managers to present their sectors.

Major interventions in the past financial year had been in the competition function of the economy and the dominance of the cartels and even changes to the relevant Act. The DG would deal with the infrastructure coordination that EDD had been involved with. Industrial financing of small and medium businesses had been done in conjunction with the Industrial Development Corporation (IDC). EDD had supported and unblocked investment, especially by unblocking municipal issues as the Department had received many complaints from companies that could not conduct business because of the local municipality. Provincial support and localisation was at the top of the Department’s interventions. The two Departments were both working on trade and industrial policy facilitation and would soon be able to combine their efforts. The clean audit had been a target and the Department would be working hard on maintaining good controls.

Presentation by the Economic Development Department

Dr Tom, DG of EDD, presented the highlights. He showed that SA had been tracking the global economy but, in 2014, SA had decoupled from the global economy when the global economy continued to grow but the SA economy declined and yet, even in the decline, R71 billion had been injected in the economy in 2018.

Researcher Mr Verwey said that there had been four financial years of under 2% growth so it was important to nurture the seeds of growth. In a comparison of SA economy between the last two financial years, job creation had lagged in the recent financial year. In comparing 2018/19 and 2017/18, the SA economy had grown from R4.7 trillion to R4.9 trillion; total employment was 16 291 000 in 2018/19, down from 16 378 000 the previous year but infrastructure spending was up to R255.1 billion from R236.2 billion the previous year.

The President had signed the Competition Amendment Bill into law on 13 February 2019. The main focus of the Act was economic transformation and addressed two key structural challenges in the South African economy that limited the rate of growth and the level of economic inclusion: the high level of concentration where a small number of large dominant firms accounted for the bulk of sales in a given market, and racially skewed pattern of ownership in the economy. In the year under review, the Competition Commission had imposed penalties of R2.8 billion. Those fines had gone to the National Revenue fund.

Ms Irene Ramotola, CFO, informed the Committee that EDD had had its second clean audit. For the year under review the Department had spent 97.3%, i.e. an under-spending of 2.7%. There had been an under-expenditure of R26 million because transfers could not be made to the big construction companies that were under business recovery. 87% of the budget was transferred to the department’s entities and the majority of the R1 billion operational budget had gone to employee compensation.

Fruitless and Wasteful Expenditure had been incurred because the Human Resources policy had been incorrect and people had been paid bonuses for which they were not eligible. The person responsible for the policy had been disciplined and dismissed but was appealing the process at the CCMA. As the monies had been classified as fruitless and wasteful expenditure, those monies would have to be recovered

Presentation by EDD on the 2019/20 First Quarter Report

Dr Tom presented the highlights of Quarter 1. He was pleased that EDD had assisted with the New Holdco/ Edgars Consolidated Stores Limited merger which would ensure that jobs would not be lost. EDD had facilitated interaction between National Department of Tourism and Industrial Development Corporation (IDC) to develop a tourism resort in the “Hole in the Wall” in the Eastern Cape. The Minister had successfully acted as arbitrator between parties involved in sale of Highveld Structural Steel Mill in April 2019, leading to a deal and saving the 220 jobs. EDD had received a complaint from Goldi Chickens that water supply to their chicken processing plant had been discontinued by the Lekwa Municipality resulting in serious environmental, financial and labour problems. After EDD intervention, the Municipality had agreed to provide some of the required water, Water Affairs had agreed that Goldi could extract water directly from the Vaal River, until such time that the municipal infrastructure was fully operational, and 3 200 workers had been taken off short-time.

Mr Verwey stated that the economy was disappointingly flat, although 3.1% annualised growth was encouraging. Mining and business services and trade had improved. The mining growth was significant but one had to see whether it would be sustained. The capital spending in the economy had been below requirements for some time. After five quarters of contraction, there had been growth in GDP expenditure and the encouraging aspect was that the money had been spent on machinery. The unemployment figures had increased but the problem was that there were new entrants in the labour force so when people felt there was a possibility of a job, they entered the labour market which meant that every increase in jobs brought more people into the market which, in turn, swelled the number of unemployed.

The KPI Report by Dr Molefe Pule, Chief Director at EDD reported on targets achieved. One target not met was the number of meetings with the Presidential Infrastructure Coordinating Commission (PICC) but that was because the Department was reliant on the DG from the Department of Labour to organise the meetings.

The HR report by Ms Ramatola indicated that the Department had 52% female staff in the senior management level.

Discussion

The Chairperson thanked the Deputy Minister, the DGs and the members of their teams.

The Secretary presented the programme for the following day: NRCS and SABS would be briefing the Committee.

The Chairperson suggested that the Committee should engage on issues relating to the two entities when they were present the following day.

The Deputy Minister informed the Chairperson that both DGs were ready to respond to Members’ questions on the reports.

The Chairperson asked for comments or questions on the dti and thereafter he would ask for questions on EDD.

Ms Mantashe proposed that Members be permitted to raise questions to both Departments. The DGs would be able to separate the questions.

The Deputy Minister agreed that it was a good idea as it would show that the Departments were moving closer to merging.

The Chairperson agreed.

Ms Yako asked the DG of EDD about steel and other manufacturing companies, and his statement that the issue was municipalities. However, in the Nelson Mandela municipality, high energy industries did not pay for electricity because the municipality could not track electricity use properly and the industries accused the municipality of incorrect billing. They held the municipality hostage by saying they would move the industry elsewhere if the municipality did not supply electricity. Could Eskom not be asked to charge a specific tariff so that it did not impact on the municipality? Municipal systems were not as efficient as provincial and national government entities. She wanted to see the economy grow without municipalities having to beg industry to work in their space.

Mr Thring asked about beneficiation. How large was beneficiation in the steel industry? Being a mineral-rich country, what other areas of beneficiation were there in the country that could be utilised but the country was not yet capitalising on and creating jobs? In what other areas were there intentions of ensuring beneficiation?

He stated that there had been a news report that Murendi Properties had been promised R14.2 million in October 2014 but dti had failed to make the grant and the Pretoria High Court had ruled against dti.

Addressing EDD, Mr Thring said that he had a problem with Competition Tribunal funds going back to the fiscus. A Competition Tribunal fine was issued because the consumer had been hurt and the money should benefit the consumer because the consumer had been ripped off by that company. In respect of the poultry industry where Goldi and Astral had been affected by poor infrastructure, he was interested to hear what kind of negotiations EDD had entered into in those areas to ensure that those particular companies cooperated with local government. What did EDD do to see that the two companies had not gone under? Did it give them assistance or money? He had spoken to a farmer who had said that water pumps cost R20 000 or R50 000 to repair but trucks were carrying water on a daily basis and the cost of trucking water cost far more than the cost of fixing the water pumps. That was happening at a local government level so the challenge with infrastructure and the impact that it had on the local economy was huge. EDD had to ensure that, in the area of infrastructure development, the country was not selling itself short.

Ms R Moatshe (ANC) said that dti had made a sizeable amount of incentive investment in Gauteng at R3.6 billion, which was understandable given that Gauteng was the economic hub, but how could incentives be used to decentralise economic growth in provinces?

Ms Motaung asked how active the awareness campaigns were with regard to black industrialist incentives in the rural areas? Did the Department target industrialists or was it open to all and how effective was it?

Mr Mbuyane welcomed the presentation. He asked if EDD or dti had a rural awareness and education program? Was it successfully provided in the provinces? In respect of the incentives and the tax, he asked if the Department could provide a list of beneficiaries as he was particularly interested in seeing if the women and youth were benefitting? Regarding the challenge with localisation, was there a programme to educate local and provincial government about localisation?

Mr Mbuyane asked about the turnaround strategy in the DTI regarding those entities that would be presenting the following day: SABS and NRCS. Could dti should present its turnaround strategy?

Concerning the integration of the National Empowerment Fund (NEF) and The Small Enterprise Finance Agency (sefa) into one entity, could the Committee have an update on the process? There were so many different funds in EDD. Could they be channelled to the appropriate departments, such as Tourism, etc.? Was there not a duplication of work?

Mr D Macpherson (DA) stated that the Deputy Minister had taught him something new that day. He had had no idea that SA had a thriving pottery industry and he appreciated being enlightened. He hoped that, considering they came from the same province, she would be able to enlighten him further on the pottery industry that she had referred to in her speech or remarks. [Note: the Deputy Minister meant the poultry industry].

Concerning the film industry that DG October had spoken about with passion, he said the Western Cape was experiencing severe problems in getting projects approved for film making in South Africa and the Western Cape because of the cap issue and the slowness of approvals and there not being enough money to work with the incentives. When was the dti going to revisit the film requirements and policy as it was rather outdated? One company wanted to do a $50 million production and the dti seemed to be finding reasons not to make things happen. The Department seemed to have shifted from finding reasons to make things happen to finding reasons for things not to happen.

Mr Macpherson said that in respect of the job creation trust, he had highlighted in June 2019 that Creative Designs, a company set up by unions, had been granted R24 million but only R12 million had been paid. The Department spokesperson had said, by end July, R12 million would be paid but it had not been paid and now the company was going into liquidation, costing 300 jobs. How was it possible that an amount was promised and that money had not been paid? Could the DG take him through the issue? He had put a question to the Minister about Industrial Parks but he had admitted that not a single local government had made any agreement about concessions and not one was offering any rebates. Until that happened, there would be no investments in industrial parks. He knew there was no corporate investment because the Minister himself did not know about investments.

Mr Macpherson asked the Deputy Minister about IDC loans to politically connected persons. Mr Matthews Phosa had been granted a loan of R105 million in 2009 for a company that he was involved with but he had never paid back a single cent of that loan. Mr Macpherson wanted the DG to make a list available of all politically exposed people that had outstanding loans and all written off loans. He asked for a commitment to provide such a list to the Committee.

With respect to the Competition Commission, he stated that the DG of EDD would know that the R125 million for the budget review was set aside by the Commission and was placed on hold by National Treasury because the forensic audit by Ndzabandzaba attorneys had not been completed. The bulk of irregular expenditure in the Competition Commission resulted from hundreds of millions of rand that had been paid to that company for work that could not be accounted for. Could the DG tell him when that forensic audit would be completed by Ndzabandzaba as no money for investigation would be released until that investigation was completed. He cautioned against IDC being used as a bail out for companies that could not operate. One did not save jobs through investments. It had to be cautious in the equity it took and retail was a dying business. Why take equity in a company that had not taken a profit in many years, such as Edcon? What were the very strict parameters for taking debt in companies that were essentially bail-outs?

Ms Mantashe was worried about the audit reports on SABS and NRCS because the problems in those entities had been happening over a period of time and had showed no improvement. What oversight had there been by the Department when there were ongoing vacant posts? In respect of the First Quarter Report, she asked about the perquisite of R30 million for black industrialists. That had to be reviewed or fronting would continue. How many jobs to be created in the “Hole in the Wall” project in the Eastern Cape?

The Chairperson asked Ms Mantashe to make reference to the presentation when she asked questions as he did not understand some of her questions, even if the Departments understood the questions and as Chairperson, he had to know what was being asked in the meeting.

Ms J Hermans (ANC) thanked the Departments for the presentations. The Committee had been told, during its visit to the One Stop Shop, that the biggest challenge to international investment was the challenge of Home Affairs. Dti had a memorandum of understanding with the Companies and Intellectual Properties Commission (CIPC) and there was a quick turn-over in the processing of company applications. However, the Committee had been told that the biggest challenge to investment was Home Affairs. So why could the same seamless process with CIPC not be implemented with Home Affairs? When investors were told that it would take three months to obtain a visa, people left. Departments had to take seriously the President’s commitment to improving the ease of doing business.

Concerning unemployment numbers and jobs created, Ms Hermans asked if there was a job target in investments or were jobs just a consequence? If government was increasing jobs but more people were unemployed, surely job creation targets should be doubled or tripled with whatever money was put out there to build the economy? Could the Department not take money from other projects to build childcare centres as Mr Verwey had said that it was women who were entering and exiting the job market and she was sure that it was related to childcare? She asked about the Tirisano project. She did not know what Tirisano was.

The DG explained that it meant “working together” in Setswana.

Ms Hermans replied that Google had told her that it was a 25% black owned mining company.  She said that a lot of money was put into education. She understood that one had to apply to undertake the social projects but what did the Department do to get social projects like sports fields and other social projects? The Department could not just leave it to chance.

Ms Hermans responded to the comment by Mr Macpherson’s request for IDC to account for politically connected people. Where did one begin and end with such classifications? Maybe it was better to get a report on all loans that had been written off over R1 million instead of using a politically created category.

To assist Ms Hermans, Mr Macpherson explained that the term was PEP – politically exposed persons - and that it was a financial sector-defined category and all financial institutions had to undertake additional oversight of politically exposed persons. It was a financial sector category and not one made up by himself.

Ms Hermans appreciated the education.

Mr Mbuyane asked about the requirement for becoming a BBBEE beneficiary. What was understood by black-owned? Was it 51% black-owned? Why pump money into Tirisano which was only 25% black-owned and that meant 75% white-owned?

The Chairperson said that when one was trying to check the questions asked and how the Departments would receive the questions, one was concerned about some of the questions. There should not be communication that did not relate to the meeting, e.g. pottery. He took the pottery business on a lighter note.  Some of the questions might be political and not directly related to the presentation so he wanted to say that it was not necessary for the Departments to respond to such comments. He was sure that the Deputy Minister and DGs had heard the comments but the Deputy Minister might not have dealt with the issues. The forensic investigation and the bail-out by IDC and the issues raised by Mr Macpherson were something else.  The Members had asked some questions but he did not know what they were talking about. The point of a presentation was that Members should ask questions only about the presentation. He did not want Members to bring up issues from discussions held outside of the meeting as he had to know what was going on.

Response

The Deputy Minister said some questions, such as the loans not paid, would require the Departments to go back and get information. Also, she was not sure about the pottery business and did not know what Mr Macpherson was talking about. She was in the dark about the pottery business but Mr Macpherson could engage with her.

The Chair interjected and asked the Deputy Minister to ask Mr Macpherson what he was talking about as the two were talking to each other in the presence of the Committee Members so he needed an explanation of what they were talking about. They had chosen to include the entire Committee in their space so they had to explain.

The Deputy Minister continued that she had wanted to say that when the DG responded, he should refer to the letter issued by the Western Cape on how to procure locally produced goods where the Western Cape had put a threshold of companies worth R30 million or R20 million being required to comply with local production. That would clarify the question to AGSA and Mr Mbuyane’s question about the threshold of R30 million. She asked DG Tom to commence the responses.

EDD Response

Dr Tom replied to Ms Yako about electricity problems between municipalities and steel industries. That was a problem across the country. At Vanderbijlpark, the same problem had arisen. EDD had brought in Eskom, the National Energy Regulator (NERSA), the Department of Energy and the Department of Gauteng Economic Development because the municipality was under section 159 administration. Because the problem cut across so many entities, EDD had to find a crosscutting solution. Municipalities did not pay over to Eskom so Eskom had own challenges but together there had been a reasonable agreement. The steel industries were the backbone of the economy but municipalities saw revenue in electricity tariffs and then did not address the problems in industries that would close down. The industries in return threatened to cut jobs, etc. A balancing act had been found. The industries had to apply to Eskom to exploit the relief. The formula was generic and he was hoping that if the problem presented itself in other places, the formula could address the problem, including the Port Elizabeth problem that he had not been aware of. He had insisted that Gauteng Province had to find a way because it involved a municipality under section 159 provincial administration which had its own challenges.

Concerning the poultry industry, he said that he would speak about what had happened at Lekwa municipality. It had been a water, or utility, problem. The poultry industry needed millions of litres per day for slaughtering birds and they used more water than the entire community used per day. Goldi Chickens was a big producer and it employed some 4 500 people so one had to find a balance between the community and industry. Goldi was prepared to finance the infrastructure and could cross-subsidise infrastructure with R10 million so that the municipality could provide some of the water, but for the long term, the Department of Water and Sanitation had to address the issue as a company had to have a licence to extract water from the Vaal River.

He agreed that the Competition Commission penalties went to national revenue. That was one funding model. EDD had engaged with National Treasury as it was a huge amount, but National Treasury needed the money. EDD had appointed a panel to look at the funding model for Competition Commissions internationally. It was agreed that it was important for the Commission to be funded by a grant and not by the fines. It was agreed that the money be appropriated so EDD had not changed the funding model. National Treasury said that the money ultimately benefitted the consumers.

Regarding politically exposed people (PEP), DG Tom accepted the category. Mr Macpherson had sent a Parliamentary Question to his Department and had listed people various people as PEP and the Department had replied and Matthews Phosa had been on that list. He asked Mr Macpherson if something was still outstanding.

The R125 million that Mr Macpherson had spoken about had been a provisional amount. A forensic investigation had taken place, including into the company that was going bankrupt. When the investigation was about to be concluded, National Treasury had given an extension of scope and so the report was not yet ready but it was difficult to say when it would be ready. The team had started work on the extended scope that week. However, the extended scope of the investigation meant that they had to go back and examine documents over three or four years.

Dr Tom was not aware of the company that was said to be financially distressed (Edcon) as EDD did not get involved in the decisions of IDC as it was one of the few viable State Owned Enterprises (SOEs) in the country, but he assured the Committee that no external pressure had been put on IDC to finance failing entities. He did not have the details on hand but he did not think that he would be permitted to give details of a contract between IDC and a client. The “Hole in the Wall” investment would produce 220 jobs, including 65 full time jobs.

Mr Tom added that Tirisano funded social development construction projects. R60 million had been allocated to fund the toilet project. The trustees of Tirisano determined how the funds would be utilised.

DTI response

DG October noted that Ms Yako had not had a question for him as she was probably saving her ammunition for SABS and RNCS the following day. He responded to Mr Thring’s question on beneficiation and the value chains. Dti had held a mining Phakisa and had identified about five or six streams of beneficiation from mining equipment to titanium to plastics and polypropylene. Mining equipment had been a key focus area for quick wins because there was a history of mining equipment in SA. The Mandela Mining Precinct had been set up. SA had 80% of the world’s platinum and with Zimbabwe made up 100% of platinum reserves. After years of development, SA would be making fuel cells. Dti had supported fuel cell electricity generators at the mining houses so that they could see how fuel cell power generation worked. The first commercial plant was now producing fuel cells. The other important value chain was utilising both iron ore and coal which formed the basis of steel.

Mr October explained that Murendi Property had applied for the black industrialist programme. R7.8 billion was distributed to black industrialists so there was a process of due diligence and dti had an inspectorate to ensure that there was no fraud or corruption. Dti was worried because the company had given three different BEE certificates as that was usually an indication of fraud or even fronting. When dti did an inspection, there was no manufacturing in evidence despite what Murendi had said. Dti had opposed the judgement obtained in a lower court and that judgement had been set aside. Murendi needed to answer the questions on potential fraud.

He agreed with Ms Moatshe that Gauteng had the majority of incentive support because the majority of industry was in that province. A number of programmes spread support across the country. The Special Economic Zones (SEZs) were located in all provinces. The provision of grants had been made to industries in East London, Coega and KwaZulu-Natal where over 180 investors had been attracted to the special economic industrial zones. All of the industrial parks were in rural areas. He informed Ms Motaung that the Black Industrialists (BI) Programme was only three years old and had very strict criteria. The industry had to be more than 50% black-owned. The Programme was spreading to the provinces by having agreements with the provinces and municipalities, both of which identified the industrialists. There were also roadshows to inform people. There were 140 black industrialists in the programme. Investments had to have a value of R30 million as dti did not want to limit development to small business but to develop large businesses. Now dti was looking at R10 million investments for “baby BI’s”, i.e. smaller black industrialists.

Mr October promised to provide Mr Mbuyane with a written response on the details about the women-owned, youth-owned and black-owned businesses. Regarding localisation, 24 local products had been identified, including clothing, textiles and footwear and every police and army uniform had to be procured locally. SABS would verify the local content. Garth Strachan, the Acting CEO, was setting up a local content verification office as part of his turnaround strategy for SABS.

He stated that he would address the questions on NRCS and SABS the following day and he would present the turnaround strategies. Dti had cleaned up 10 entities. The board and CEO at SABS had been fired and the entity was under administration and almost ready to come out of administration. After two CEOs at NRCS, dti had replaced the CEO with an official from dti. Corruption frequently started with the boards. He was convinced that those two entities would be cleaned up. There had been consequence management but dti was going to have to second additional officials to the NRCS. One person from dti worked in NRCS but Mr October’s recommendation would be to second more officials, for example one of the officials from AGSA had applied for the CFO position but had not been selected. Perhaps he could be seconded to assist. The Minister had agreed that dti needed to take further action. However, dti needed step-in rights.

Concerning the film sector, he said tens of thousands of jobs had been created but the budget was severely limited and there had been no increase to the incentives budget over the past three years. Dti also had the new programmes of black industrialists and industrial zones to accommodate. Dti could not have one or two companies taking up the entire amount so there was a cap on the amount available. Dti had had to produce a programme for Hollywood film makers and another for local black film makers to enter the market. Dti had a track record of showing how the incentive programmes had worked and he hoped that the funds available for incentives would be increased.

Regarding the job trust, Mr October explained that because dti had R7 billion to give away, everyone would try to capture dti. So, to prevent fraud and keep a clean record, dti had instituted inspection, due diligence and payment in three tranches so that no one ran away with the money. The first tranche was easy to obtain but to get the second tranche, dti inspected and checked jobs. The jobs trust diligence was more onerous as it was funded by the European Union which demanded high accountability. One company had not had its paperwork in order so National Treasury had held back on the tranche. As DG Tom had said, DGs could not get involved in the decisions as to who got the money so they had adjudication committees with staff and sometimes outside experts that adjudicated applications and made the decisions. Mr October sat in the appeal process but he did not personally overturn any decisions. If he had one major case of fraud in the Department, he would lose the entire incentive programme. National Treasury would just take away the programme. However, he was always happy to respond to queries.

He agreed that obtaining a visa was a major problem for foreign investors as people could not get visas. For example, Proctor and Gamble had had difficulties in flying in engineers to get their factory up and running. The President had asked how soon the Home Affairs could move to eVisa which was the fully electronic way that CIPC operated. One applied electronically and received an answer quickly. The President had visited Home Affairs and demanded that the eVisa process be speeded up. Dti had requested that the eVisa become a key deliverable in the Tourism Master Plan.

The Deputy Minister stated that DGs had covered the questions except the question about how municipalities were assisted, e.g. with the ageing infrastructure. Everyone had to be part of the project. The intervention was to sit with each municipality and make sure that it engaged because, even though the local industries would assist, the infrastructure remained with local government. She gave an example of how such an intervention had worked in Harrismith regarding water quality and with SAPPI in KwaZulu-Natal which had had problems with electricity. Dti did not assist on its own. The municipality had to be a partner.

She added that roadshows were valuable so when the roadshow travelled, everyone was there to resolve the problems immediately. It was a One Stop Shop and all problems could be addressed, especially for small businesses. People usually did not get involved in programmes because they were not aware of them. There were many enquiries after a roadshow as everyone now understood what was available.

Mr Macpherson said that the DG had the wrong information as the Department had said that a trust was entitled to the funds. The Department had said that National Treasury was processing the funds and would pay out the funds. He said that the company was going to close and 300 jobs would be lost.

The Chairperson said that the issue was not for the meeting. It could be followed through directly with the DG. It was abusive because no one else knew what he was talking about. Mr Macpherson was reading from documents that other Members did not have access to. Mr Macpherson had to discuss the matter directly with the DG. He instructed the DG not to answer the question. He asked all Members not to use the Committee as part of their audience for private issues. If they had matters that they had not tabled through him, those matters could not be discussed in a meeting. It was highly abusive to do that.

The Chairperson closed the meeting.

The meeting was adjourned