North West Intervention: National Treasury and AGSA briefing; with Deputy Minister of Finance

Meeting report

The Chairperson welcomed the Committee Members and the delegations from National Treasury and the Auditor-General of South Africa (AGSA).

The delegation consisted of the Deputy Minister of Finance, Dr David Masondo, the Director: Provincial Budget Analysis at National Treasury, Ms Matankiso Mary Matjeke, the Deputy Director-General: Intergovernmental Relations at National Treasury, Ms Malijeng Ngqaleni, and the AGSA’s Corporate Executive for Regulatory Audits for the North West province, Mr Success Marota.

The purpose of this virtual meeting was for National Treasury and the AGSA to brief the Committee on progress made in the Section 100 Intervention in the North West province.

Section 100 of the Constitution says national intervention in a provincial administration may take place, when a province cannot or does not fulfil its executive obligations according to the Constitution, or the relevant enabling legislation. The first item on the agenda was the briefing from the National Treasury regarding the provincial finances of the North West province. The second item on the agenda was the briefing from AGSA on the provincial audit outcomes for the North West province.

The Chairperson said the briefings made to the Committee will contribute to Members work significantly. This is especially the case regarding the Committee’s mandate to understand the situation properly, and to assess progress in the Section 100 intervention in the North West province.

One of the main reasons South Africa’s national government decided to invoke Section 100 of the Constitution to facilitate the intervention in the North West province, was because of the province’s deteriorating financial system, which was due to several contributing factors, including a declining audit, lack of compliance shown in the North West audit outcomes, as well as ineffective consequence management.

Opening remarks by the Deputy Minister of Finance:

Deputy Minister of Finance, Dr Masondo, thanked the Committee for the opportunity to brief Members on what happened since the start of the Section 100 Intervention in 2018.

Briefing by the National Treasury on the Provincial Finances of the North West

The first item on the agenda was the briefing from National Treasury regarding the provincial finances of the North West province. Ms Matjeke presented the briefing to the Committee. The information in the presentation reflected the situation as it was on 31 December 2020.

Departmental Budget and Expenditure

Ms Matjeke gave details on the budgets and expenditure per provincial department in the North West province, between the 2017/18 and 2020/21 financial years. The budget allocation for the Provincial Department of Health consistently increased as a percentage share of the provincial budget, from 26% in the 2016/17 financial year to 28.4% in the 2020/21 financial year, excluding the COVID-19 allocated funding.

Provincial spending was stable, but the majority of departments recorded slight under-spending, except for Health, which recorded over-spending in the 2019/20 financial year. In the 2017/18 financial year, the provincial Department of Health contributed to under-spending. In the 2017/18 to 2019/20 financial years, the provincial departments of Education, Public Works and Roads, Agriculture and Rural Development, the Office of the Premier, and the provincial Department of Human Settlements, contributed to under-spending. This was the result of poor spending performance on conditional grants.

The North West province lost its conditional grant allocations for the provincial Department of Education, amounting to R125.37million in the 2018/19 financial year, amounting to R 225.62million in the 2019/20 financial year, and in the provincial Department of Human Settlements, amounting to R100million in the 2020/21 financial year. Stopping conditional grant allocations reflected the province’s poor planning and delivery on these projects, within its respective departments.

Historical Expenditure Outcomes

The National Treasury reported North West’s provincial under-spending equalled R3.49bn for 2017/18, to 2019/20 financial years. It increased under-expenditure from R939.91million in the 2017/18 financial year, to an amount of R1.53bn for the 2019/20 financial year. The allocation of conditional grants contributed to a share of R1.9bn of 54.56% of the total under-spending amount of R3.49bn, over the three years National Treasury reported on.

For the current 2020/21 financial year, the spending as of 31 December 2020 amounted to R31.21bn, or 68.75% of the allocated budget. Provincial over-spending of R 461million was projected, based on the December 2020 outcomes, mainly stemming from the expenditure of the Department of Health.

Expenditure: Compensation of Employees

The North West’s under-spending on the compensation of employees was mainly during the 2017/18 and 2018/19 financial years. During the 2019/10 financial year, provincial over-spending was reported on the compensation of employees. It mainly stemmed from the North West Provincial Department of Health and amounted to R 211.63million. The spending for the 2020/21 financial year, relating to the compensation of employees, was recorded at 73.12% as of 31 December 2020. However, the provincial departments are projecting significant overspending resulting from Public Debt Management System (PDMS) liabilities and salary adjustments, which is yet to be concluded across the country. The percentage expenditure share of the compensation of employees to the provincial budget grew from 57% in 2017/18, to 61% in the 2020/21 financial year. This means this type of expense is slowly overcrowding other economic classifications such as goods, services, and infrastructure.

The provincial headcount of employees consistently increased over the years. Although the headcount numbers increased from 73 247 in 2016/17, to 94 639 employees for the 2020/21 financial year, this was mainly because of the Level 0 appointees totalling 13 249, which mainly related to additional appointments in response to the COVID-19 pandemic.

Expenditure: Cash Balances

National Treasury reported positive closing cash bank balances between the 2014/15, and 2020/21 financial years, with an average of over R1bn. Cash balances increased over the years from R1.1bn to approximately R3bn at the end of the 2020/21 financial year. This was a result of provincial departments failing to spend its budgets, and interest earned on the positive balances. At the end of December 2020, the closing cash balance was R4.8bn, which was the highest recorded positive cash balance. This increase was due to the lockdown implemented in response to the COVID-19 pandemic.

Expenditure: Irregular, Fruitless, Wasteful, and Authorised Expenses

National Treasury reported on the expenditure for the financial years between 2017/18, and 2019/20. Irregular expenditure disclosed in the 2019/20 financial year remained high at R2.9bn. However, this showed a decline of R1.2bn as reported in the previous financial year. This decline emanated from the provincial departments of Health, Community Safety, Education, and Public Works and Roads. The provincial departments of Social Development, Economic Development, Environment and Tourism, and the Office of the Premier, were the only departments reflecting an increase in regular expenditure. Fruitless and wasteful expenditure disclosed in the 2019/20 financial year showed an increase of R6 million from the R5.3 million reported previously. It emanated from the provincial departments of Public Works and Roads, Social Development, Community Safety, and the Office of the Premier. Regarding unauthorised expenditure, National Treasury reported it an increase from R203.7 million between the financial years of 2018/19, and 2019/20 in the provincial Department of Health.

Since the 2013/14 financial year, the provincial irregular expenditure realised a decline in the 2019/20 financial year. Approximately 80% of the irregular expenditure stemmed from the provincial departments of Health, Community Safety, Education, Transport Management, and Public Works and Roads. All five of these provincial departments show a decline in irregular expenditure, as reported for the 2019/20 financial year.

National Treasury reported on the reasons for irregular expenditure in the 2018/19 and the 2019/20 financial years. For the provincial Department of Education the reasons were, a tender to the value of R254million was not evaluated by the Committee, and procurement cost more than the contractual amount of R85million. For the provincial Department of Public Works and Roads, the reasons included contracts being procured without following the proper processes, which amounted to the value of R371 million. There was expenditure incurred on contracts identified as irregular in previous years, to the value of R72million. The Office of the Premier was reported for not following competitive bidding processes, to the value of R19.8million. For the provincial Department of Community Safety and Transport Management, issues were raised regarding scholar transport, to the value of R1.1bn, and irregular expenditure in commuter transport, to the value of R1.3bn. For the provincial Department of Health, there were irregular contracts to the value of R1.1bn, deviations from competitive bidding process, and expired contracts, to the value of R707.8million.

Analysis per Provincial Department and COVID-19 Expenditure

National Treasury reported on the key projects and strategies which were completed in previous financial years, and those projects scheduled for completion in the 2021/22 financial year.

See the attached presentation for a breakdown per provincial department.

The North West province’s expenditure on COVID-19 relief was reported for the period from August to December 2020, which included the procurement of Personal Protective Equipment (PPE), social relief and distress programmes, and quarantine sites. The provincial departments and public entities spent R195.2million, as reported on 31 December 2020. Notably, expenditure for COVID-19 related programmes for some provincial departments and entities remained relatively the same as compared to frontline departments such as the provincial departments of Health, Social Development, and Education. The provincial Department of Social Development’s expenditure on food parcels averaged around R1 641.11 to R2 094.30 per beneficiary, which was reported as among the highest expenditure in the country.

The cost of the Section 100 Intervention

The deployment of administrators and support teams is funded through existing national departmental budgets, with the exception of security services for the intervention team from the Department of Health, funded from the province internally. At the end of October 2020, the costs incurred by national departments intervening under Section 100(1)(b) of the Constitution, amounted to R70.1million. This included the compensation of people contracted specifically for the intervention, but excludes the compensation for full-time departmental employees assigned to assist the intervention teams.

The national Department of Health utilised an additional contribution of R9.75million from donors to support its specialist technical teams in the province. The forensic investigations managed by National Treasury amounted to R15.7million. The costs incurred by the departments intervening under Section 100(1)(a) are not quantified, as these are considered to be part of the normal support work of the national departments concerned. National Treasury reported the cost of the Section 100 intervention into the North West province amounted to R70.1million. This expenditure consisted of the R23.99 million spent on the compensation for contracted staff, and the amount of R46.12million spent on goods and services.

Conclusion

National Treasury recommended the Committee note its findings. First, it reported the North West province remains in a healthy financial position, even after budget cuts were made relating to the COVID-19 pandemic. Secondly, the Committee should take note of the cost of the Section 100 intervention. Thirdly, improvements should be aimed at achieving budget credibility and increased funding for social sector entities, such as the provincial Department of Health. Lastly, National Treasury noted concern about the poor performance on the conditional grant expenditure by provincial departments such as Education, Human Settlements, and Public Works and Roads.

Discussion

The Chairperson thanked the National Treasury for its detailed presentation. Given the nature of the issues raised in the Committee’s previous meeting with the Inter-Ministerial Task Team (IMTT), he said the financial information received of the North West province, was quite useful.

Mr S du Toit (FF+, North West) asked National Treasury to speak on its own position, regarding if the North West province is ready to operate on its own without national intervention. Regarding the high levels of over and under-spending, it is paramount for vacant posts to be filled. It is evident there is an over-spending on the compensation of employees. He asked what effect filling vacant posts would have on the already high levels of over-spending and the provincial budget. Over-spending is already something the North West province, and by extension the country, cannot afford on its limited budget allocations. He asked if it would not be wise to see if existing employees are competent to do the work which is supposed to be done by employees in the vacant posts. There seems to be a lack of political will within the provincial departments, to tend to the issue of instituting disciplinary action against implicated officials within the North West province.

Mr D Ryder (DA, Gauteng) said he appreciated the briefing by National Treasury. Regarding conditional grants, he said one or two percentage points of under-spending translates to millions of rand. To see the history of under-expenditure is problematic in a province with a dire need amongst its people. There does not seem to be capacity to spend the money within the provincial departments. The whole point of appropriation is to spend the money allocated. Under-expenditure is a massive concern. Not paying creditors was highlighted as a big risk going forward. The North West must be aware of the effect not paying creditors has on the local and national economy. It takes power away from South African people, and people in need in the North West province. The unintended consequence of government not paying its creditors on time is, next time the creditor wants to submit a tender, the creditor will price in high interest rates and legal fees to protect itself from such non-payment. This is why government ends up paying inflated prices such as R15 for a pencil worth R5, because creditors are aware government struggles for months to make payment, and as such includes the cost of recouping outstanding debts. These kinds of situations increase the cost of doing business with the government. It is the reason why provincial departments pay more for goods and services. It is unacceptable for creditors not to be paid on time, as agreed. The high levels of irregular expenditure within the North West, is a clear sign of corruption.

Mr I Sileku (DA, Western Cape) welcomed National Treasury’s briefing. He noted concern regarding the under-expenditure identified during and before the Section 100 intervention into the North West province. The high levels of under-expenditure remain a significant concern.

Mr Y Carrim (ANC, KwaZulu-Natal) said National Treasury is in the unenviable position of having to assess the Section 100 intervention and the costs associated with it. From past experiences, Parliament is aware some politicians and officials resent these types of interventions and do not necessarily co-operate with its processes. He asked what the extent of the co-operation is; what the accuracy of the figures reported during the briefing are; how it was verified by National Treasury; to what extent skills are transferred to the officials who have to fulfil tasks within the province once the Section 100 intervention is over; he wanted more clarity on what the overall state is regarding the Section 100 intervention; asked what work must still be done; to what extent the challenges in the North West province are endemic to other provinces which might operate in the same way; and how different the situation in the North West is, in substance, to other provinces which are not under intervention.

The underlying question the Committee is concerned with is what criteria must be used to determine when the intervention should be ended. The North West province is never going to be perfect in its operation. The Section 100 intervention is paramount when needed, and the province cannot function on its own. He wanted to know if National Treasury has any set criteria to determine when the intervention runs its course and can be ended. The issues at play in the North West province relate to governance, and the matter of who is deployed and appointed in the key positions.

Ms C Visser (DA, North-West) agreed with Mr Carrim regarding the situation in the North West province. Given the fact R70.1million was already spent in the province on the problems reported by the National Treasury, it is clear there was little improvement in the provincial departments of Health, Education, Human Settlements, and Public Works and Roads. The roads in the North West for example, are still in a horrible, almost unusable condition. The province needs people who administer the allocated money correctly and transparently. All of the municipalities in the North West almost collapsed.

Mr Sileku noted grave concern about the situation with the municipalities in the North West. The Section 100 intervention in the North West province is in effect for almost two years. There seems to be no improvement if, two years after national intervention, the Provincial Department of Social Development’s expenditure on food parcels averaged around R1 641.11 to R2 094.30 per beneficiary. This was reported as among the highest expenditure in the country. It is concerning to see it happens while the province is under intervention. He asked what role National Treasury played in the North West not spending its money on services. The reason National Treasury can report the Province is in a healthy financial state is not because the North West is managing its finances correctly, but rather a result of the Province’s significant under-expenditure. The Province inadequately spent grant allocations, which affects the poorest of the poor South Africans living in the North West. He asked how the Committee can be sure National Treasury will intervene timely, when provinces do not spend its grant allocations. There is a duty to ensure the grant beneficiaries are not suffering as a result.

Regarding the compensation of employees in the provincial Department of Health which is expected to escalate, he said the continuous overspending on employees is worrisome. He asked how National Treasury will ensure this issue is addressed. When moving out of an intervention, the systems of the province must be assessed. He wanted to know if the necessary systems are in place to ensure the North West province can adequately function. He also asked if the audit outcomes of the Province are acceptable, and how progress is measured.

The Chairperson thanked the National Treasury for its presentation to the Committee. The current budget for the North West province stands at R45bn. It shows an increase from when the Section 100 intervention started, when the budget stood at R39bn. Over the cycle of three years, the North West’s budget was R126bn. National Treasury used only R70.1 million to intervene in the North West. Money could be saved through the Section 100 intervention, especially given the high levels of irregular expenditure within the Province.

Regarding the 15 forensic investigations financed by National Treasury, at some point the Committee must engage with the outcomes of the investigations by law enforcement agencies. There are large fallacies, discrepancies, and a clear lack of consequence management, at the higher levels of the provincial government of the North West. Laws and regulations are there for a reason. Compliance is mandatory to ensure transparency and accountability.

Out of the budget of R45bn, only R1.6bn is budgeted for capital assets. Given the problems of inequalities, poverty, and insufficient education, this is concerning when you look at the Province’s need to improve its roads and build schools. Only R1.5bn out of the R45bn of the Province’s budget is planned for infrastructure development, which is by its nature a major driver of economic development.

There is a problem with under-spending social grants. The presentation gives no solutions to this issue which impacts the lives of people on the ground. As a result, the Committee is concerned a considerable part of the North West’s budged is lost to National Treasury because of under-spending. The Province lost conditional grant allocations for the provincial Department of Education, amounting to R125.37million in the 2018/19 financial year, and R225.62million in 2019/20. There are lost grant allocations in the provincial Department of Human Settlements, amounting to R100million in the 2020/21 financial year. Stopping conditional grant allocations reflects poor planning and delivery on projects within the respective departments. There are concerns the provincial Department of Agriculture is under-spending on its conditional grants, in a province which depends on agriculture as a driver of its economic activity. He called on the intervention team deployed in the North West province to work towards ensuring prudent and maximal spending of budgeted resources.

Response from the Minister and the National Treasury

Ms Malijeng Ngqaleni, Deputy Director-General: Intergovernmental Relations, National Treasury, replied to the question on infrastructure and the concerns of under-performance and under-expenditure. Infrastructure remains a challenge which is not unique to the North West province. Systems must be put in place with the required competency and capacity to address these issues. A dispensation must be made by National Treasury. Part of the challenge is that projects must be planned timely, to avoid problems with implementation, and to avoid poor contract management. National Treasury is attempting to ensure there is adequate skills capacity and governance structures in place. There is a concern regarding a considerable part of the North West’s budget being lost to National Treasury because of under-spending. It is a control mechanism to ensure funding goes to the provinces which need it. It works as an incentive to increase performance. It is a challenge for National Treasury to reply to non-performance issues, when the Province is provided with the funding it needs. There are fiscal restraints regarding the infrastructure within the North West province. The work was done in the relevant forensic investigations. The outcomes are to be reported to the Committee at a later stage. Regarding the audit outcomes, more progress was expected, but National Treasury is satisfied with the indicators of improvement. Processes are put in place to ensure the contract management within the provincial departments are improved, and consequence management is enforced strictly and consistently. A strong political will is needed to address the challenges at play, but other mechanisms, beside the Section 100 intervention are needed. The North West province should be able to operate on its own by now. However, the Committee and National Treasury need to strengthen its oversight role over the provincial departments within the North West.

Ms Matjeke replied to the question regarding the extent of co-operation National Treasury got from the North West government. There was always a good working relationship with the provincial Treasury on the Province’s budget management. For this reason, the figures reported by National Treasury are accurate. According to budget management, there is no skills gap in this regard, and the North West province is doing well. National Treasury is continuously working with the provincial Treasury in this regard.

On the issue of non-payment of government creditors, she said the issue is not unique to the North West province. The National Treasury is working continuously with the Province to ensure a reduction in outstanding invoices. The provincial Department of Social Development’s expenditure on food parcels averaged around R1 641.11 to R2 094.30 per beneficiary. This was remarkably high compared to the expenditure of other provinces. This issue was raised with the Member of Executive Council (MEC) for Finance in the North West, and the Minister of Finance, during budget meetings. It proposed a national standard be implemented to ensure uniformity on how food parcels are priced, and the related social programmes implemented.

Deputy Minister Masondo concluded the briefing from National Treasury. He agreed with Mr Ryder about the implications for non-payment of credit. It does not pertain only to the cash flow of the unpaid service providers, but it has an impact on the cost of doing business with the government, which is included in the pricing strategy of those service providers. This issue is exacerbated by the current COVID-19 pandemic where businesses are finding it very tough to survive the current economic climate. National Treasury received a very uneven co-operative response to the Section 100 intervention, depending on the stage of the intervention and the involved provincial department. Overall, the level of co-operation from the North West province improved significantly, although there are areas who gave minimal co-operation. There are politics and governance issues at play in the North West. Political leadership is about the exercise of power, and challenges of incompetent officials and under-expenditure in certain provincial departments speak to the quality of leadership. Where there are competent employees doing the work, these employees are often shunted out or forced to comply with corrupt activities at many levels of the governance of the province.

AGSA on the Provincial Audit Outcomes of the North West

The second item on the agenda was the briefing from AGSA on the provincial audit outcomes of the North West province. Mr Success Marota, Corporate Executive:  Regulatory Audits for the North West province, presented the briefing to the Committee.

Mr Marota reminded the Committee the AGSA has a constitutional mandate and, as the supreme audit institution of South Africa, exists to strengthen our country’s democracy by enabling oversight, accountability, and governance, in the public sector through auditing, thereby building public confidence. The Constitution requires all public administrations to be accountable and transparent.

Summary of the 2018/19 Audit Outcomes

For the 2018/19 financial year, the AGSA reported it saw stagnation in the audit outcomes of the North West Province, and said a greater effort and focus is required to shift towards improvement. This was the year in which the Section 100 intervention in the North West began. The audit outcomes remained largely the same for the 2017/18 and 2018/19 financial years.

There was a change in two of the provincial departments, where one improved and the other one regressed. Overall, there was stagnation in the audit outcomes. The provincial Department of Tourism regressed with a qualified audit opinion, and the provincial Department of Arts and Culture improved from a qualified to an unqualified audit opinion.

Summary of the 2019/20 Audit Outcomes

The AGSA reported, for the 2019/20 financial year, there was an encouraging trend, but there was still a need to embed preventative controls and to promote a culture of consequence management. As at the end of March 2020, the 13 provincial departments showed an increase in obtaining unqualified audit outcomes made with findings. One provincial department obtained an unqualified audit outcome with no findings. Seven provincial departments obtained unqualified audit outcomes with findings. Four provincial departments obtained qualified audit outcomes with findings, and one provincial department obtained a disclaimed audit outcome made with findings.

Reflection on the Provincial Departments under Section 100(1)(b)

Regarding the Office of the Premier, the AGSA reported the entity addressed the prior year’s qualifications on transfers and subsidies, goods and services, and irregular expenditure. However, an unqualified opinion was only achieved because the entity subsequently corrected all misstatements identified during the auditing process. The provincial Department of Education reported an unqualified opinion from 2013/14. However, an unqualified opinion was only achieved because the entity subsequently corrected all misstatements identified during the auditing process. With the provincial Department of Health, the AGSA identified problem areas relating to the findings made for the compensation of employees, and goods and services. Regarding the provincial Department of Public Works and Roads, the AGSA identified problem areas relating to the findings made for goods and services, transfers and subsidies, and pre-payments and advances. For the provincial Department of Community Safety and Transport Management, the AGSA identified problem areas relating to the findings made for pre-payments and advances, goods and services, and instances of irregular expenditure. The continued reliance on auditors to identify material misstatements for management to correct is not sustainable. The AGSA recommended the accounting officers should be proactively addressing risks identified during the audit process to improve the control environment.

Regarding the credibility of performance reporting, it reported only one provincial department, 20%, had no material findings as it subsequently corrected all misstatements identified during the audit.

The AGSA reported the incidence of non-compliance. Key legislation remained unchanged, with all five major provincial departments assessed as having material findings of non-compliance. The areas of non-compliance which are the most common included the prevention of unauthorised, irregular, and fruitless or wasteful expenditure, 100% had findings of non-compliance; effecting consequences, 100% had findings of non-compliance; the management of procurement and contract systems, 100% had findings of non-compliance; the quality of financial statements, 100% had findings of non-compliance; and strategic and performance management, 80% had findings of non-compliance.

The annual irregular expenditure decreased from R3.8bn to R2.6bn. The number of departments incurring irregular expenditure remains unchanged. Irregular expenditure on multi-year contracts can be reduced through investigations, followed by condoning or cancellation of contracts irregularly awarded as provided for in the enabling or governing piece of legislation. There were five provincial departments identified contributing to 65% of the irregular expenditure for the North West province.

The AGSA reported it was due to a culture of non-compliance created by a lack of effecting consequence management. The main reasons for incurring irregular expenditure were identified as including competitive bidding process not followed; or reason for deviating not appropriate; contracts amended or extended without appropriate approval; and the procurement from suppliers without SARS tax clearance. The unauthorised expenditure increased from R22.2million to R203.7million, and all of the unauthorised expenditure in both years related to over-spending the budget by the provincial Department of Health. Fruitless and wasteful expenditure increased from R11.5million to R11.8million, which was caused solely by interest payable on late payments.

Reflection on the Provincial Departments under Section 100(1)(a)

Regarding the Provincial Treasury, the AGSA reported a clean audit was maintained for more than five years. For the provincial Department of Social Development, the previous year’s qualifications on employee costs and irregular expenditure were addressed. However, an unqualified opinion was only achieved because the entity subsequently corrected all misstatements identified during the auditing process. For the provincial Department of Cooperative Governance and Traditional Affairs, the previous year’s qualifications on fruitless and wasteful expenditure were addressed. However, material adjustments were still required every financial year. For the provincial departments of Economic Development, Environment, Conservation and Tourism, Sports and Recreation, and Arts and Culture, there were no qualifications from the previous year. However, an unqualified opinion was only achieved because the entity subsequently corrected all misstatements identified during the auditing process. For the provincial Department of Agriculture and Rural Development, areas of concern were highlighted as including pre-payments and advances, goods and services, receivables, immovable and tangible capital assets, lease commitments, contingent assets, and irregular expenditure. For the provincial Department of Human Settlements, almost all line items were qualified because of the submission of its annual financial settlements without the underlying records, such as a correct general ledger.

Regarding the credibility of performance reporting, it reported only one provincial department, 14%, had no material findings as it subsequently corrected all misstatements identified during the audit.

The AGSA reported the situation of non-compliance. Key legislation remained unchanged, with all seven major provincial departments assessed as having material findings of non-compliance. The areas of non-compliance most common included the prevention of unauthorised, irregular, and fruitless, or wasteful expenditure, 71% had findings of non-compliance; effecting consequences, 43% had findings of non-compliance; the management of procurement and contract systems, 86% had findings of non-compliance; the quality of financial statements, 86% had findings of non-compliance; and strategic and performance management, 43% had findings of non-compliance.

The annual irregular expenditure increased from R909.3million to R1.2bn. The number of departments incurring irregular expenditure remains unchanged. Irregular expenditure on multi-year contracts can be reduced through investigations, followed by condoning, or cancelling contracts irregularly awarded, as provided for in the enabling or governing piece of legislation. The AGSA reported figures are not complete because of two provincial departments, 28%, having qualified findings on incomplete disclosure of irregular expenditure. There were seven provincial departments identified which contributed to 30% of the irregular expenditure for the North West province. The AGSA reported it was due to a culture of non-compliance created by a lack of effecting consequence management. The main reasons for incurring irregular expenditure were identified as including competitive bidding process not followed; or reason for deviating not appropriate; contracts amended or extended without appropriate approval; and three written price quotations were not always obtained. Fruitless and wasteful expenditure decreased from R50.1million to R6.7million, and the incurred amounts were caused solely by interest payable on late payments. It must be noted the 2018/19 figure of fruitless and wasteful expenditure included the R49.8million spent on the demolition of buildings due to poor quality of work, identified during milestone verification processes.

In general, the AGSA reported the impact of poor-quality submissions includes pressure on audits and increased audit fees. The continued reliance on auditors to identify material misstatements for management to correct is not sustainable. The most common findings remain the lack of sufficient appropriate audit evidence to support reported performance information. This is an indicator the control environment remains a concern. Irregular expenditure of previous years were not properly dealt with through investigations, and followed by condoning, recovery, or write-off, of the expenditure. Accounting officers and authorities should focus on and deal with the irregular expenditure as required, to avoid material irregularities from being raised.

Implementing the Material Irregularity Process

Mr Marota said if the accounting officers or authorities do not appropriately deal with findings of material irregularities, then the AGSA’s mandate allows it to follow the material irregularity process. This consists of referring material irregularities to the relevant public bodies for further investigations. The AGSA is then empowered to recommend actions to resolve the material irregularities in the audit report, and to take binding remedial action for the entity’s failure to implement recommendations. If financial loss was involved, the AGSA can issue a certificate of debt for failing to implement its remedial action. To allow for establishing capacity and processes, a phased-in approach for identifying material irregularities was followed in the 2018/19 audit, and the 2019/20 audit, based on the type of material irregularity to be reported, and the parties being audited, where the process is implemented.

Irregularities identified in the 2018/19 financial year included a contract of R35 million by the provincial Department of Community Safety and Transport Management, awarded to learner driver training in 2015, and payments for the scholar transport scheme in 2019.. Irregularities identified for the 2019/20 financial year included a contract of R407 million, awarded for flights to Mahikeng and Pilansberg in 2015, by the provincial Department of Community Safety and Transport Management. There were six other material irregularity investigations in progress on the date of the audit reports for the provincial departments of Health, and Public Works and Roads.

The Accountability Cycle, Root Causes, and Preventative Controls

There was an improvement in the level of assurance provided by the co-ordinating provincial departments and oversight. The Office of the Premier was responsible for the management and administration of the province’s Information and Communication Technology (ICT) infrastructure, including hosting of systems on behalf of the other departments. It did not implement controls to manage secure access into/transmission of information within the Province, as well as outside the network of the province. Therefore ICT support remains concerning. Although provincial Treasury sustained a clean audit over the last five years and supported other departments with technical advice and action plans, it remains concerning that best practices are not replicated in the Province. The impact of this support was not evident and effective at all provincial departments.

The AGSA identified the root causes of the high levels of irregular and unauthorised expenditure in the North West province as including slow responses, instability, vacancies, incompetency, and inadequate consequence management. Management, meaning, accounting officers and senior management, political leadership being executive authorities, and oversight bodies, including Parliament’s portfolio, do not respond to the AGSA’s messages about addressing risks and improving internal controls, with the required urgency. This slow response from management was evident at 36%, and no response from 64% of the parties being audited, with unfavourable outcomes. Instability and prolonged vacancies in key positions can cause a capacity gap and affect the rate of improvement in audit outcomes. The focus is on preparing financial statements which will be corrected through audit adjustments. However, key controls which enable reliable and timely financial reporting during the year, such as proper record keeping, and daily, and monthly, reconciliations, are not institutionalised. If officials who deliberately or negligently ignore duties and contravene legislation are not held accountable for actions, such behaviour can be seen as acceptable and tolerated.

It is paramount for implementation of preventative controls as the ultimate deterrent. This will enable oversight structures to assess if the most important preventive controls are implemented by institutions to address the main areas of risks. This will assist oversight structures to diagnose weaknesses in preventative mechanisms, and focus oversight efforts on obtaining assurance from the executive authority, and the accounting officer, or authority, regarding those weaknesses being effectively addressed in accordance with legislated obligations. It enables the accounting officer or authority and the executive authority to effectively address the assurance needs of oversight structures pertaining to preventative controls. It also creates a general awareness of the accounting officer’s role or authority, and the legislated obligations towards good financial and performance management in its institutions.

The AGSA said its recent general report tabled in Parliament has a strong message about good preventative controls being institutionalised in a deliberate and focused manner. The message was well received by oversight structures and executive authorities, and the need for the AGSA to support the administration of government in its commitment to focus on prevention is apparent. Therefore, the AGSA developed preventative control guides in collaboration with National Treasury to support this new chapter in the accountability journey.

Discussion

The Chairperson thanked the AGSA for its detailed and comprehensive briefing on the audit outcomes for the North West province. It aided in ensuring the Committee can exercise its oversight role and duties fully informed and up to date on the financial situation of the province.

Mr Ryder said the picture presented by the AGSA showed an exceptionally dire situation in the North West province under the Section 100 intervention. There are some areas of improvement which are welcomed, but it must be borne in mind it is as a result of the intervention itself. The municipality does not show an ability to stand on its own two feet. The problems in the North West province were not resolved in relation to its financial challenges. This is evident from the slow response from management, and no response from 64% of parties being audited, with unfavourable outcomes. It showed there is no political will or local reaction to the mess created at a provincial level. Only where there is direct oversight over these conditions did improvements follow. The Section 100 intervention in the North West extended for another three months until the end of June 2021, but three months will not be adequate to repair the deep-seated issues within the Province. There are more significant changes which need to happen to ensure a total clean-up of the situation in the North West.

Mr Carrim thanked the AGSA for its briefing and report. The issue of a lack of consequence management was raised in many of the committee meetings, and was raised even by the Committee’s Content Advisor. He asked if the AGSA considered using its powers conferred under the recently passed Public Audit Amendment Act of 2018. There is a dire need for more concrete measures of consequence management, in line with the new legislative teeth assigned to the AGSA. The intervention in the North West province was justified. However, there needs to be a clearer stance on what the criteria would be for an exit of a Section 100 intervention, because a vague set of guidelines are not sufficient on its own.

Ms Visser said the Public Audit Amendment Act created the relevant steps the AGSA must follow relating to material financial losses. He posed the questions, why are the provisions of the Public Audit Amendment Act not used; did the AGSA open any cases in alignment with its powers under the Public Audit Amendment Act. Regarding the material irregularities, there are no controls in any of the provincial departments, nor any checks and balances to ensure accountability and good governance. The question to be asked was why are there no improvements in the quality of the Province’s internal controls after three years of intervention.

Mr S Zandamela (EFF, Mpumalanga) said the situation in the North West is concerning, especially because the Office of the Premier, who is responsible for the governance of the Province, is also implicated in the high levels of irregular expenditure. The high levels of irregular, fruitless, and wasteful expenditure is unacceptable. It translates into billions of wasted Rands, simply as a result of non-compliance and poor governance in the Province. The Committee must focus on all the deviations from proper and good governance, in continuing its work on the Section 100 intervention in the North West.

The Chairperson said Members want to see the Public Audit Amendment Act with some teeth, and with biting consequences for material irregularities in the North West. The lack of consequence management remains a grave concern. He called on the AGSA to utilise provisions of the Public Audit Amendment Act to recoup some of the losses incurred in the North West. It also considered issuing a certificate of debt for suspected material irregularities found during successive negative audits.

Response from AGSA

Mr Marota replied saying the AGSA is aware of its new powers under the Public Audit Amendment Act, and the process of implementing it is unfolding. The AGSA needs to observe the relevant principles around the administration of justice, which can cause a delay in utilising the provisions of the Public Audit Amendment Act.

The first stage of the process is, once a material irregularity is identified, it will be issued to the accounting officer involved, who must inform the AGSA on the measures taken to correct the irregularity. Through this process, the AGSA is empowering the accounting officer to discharge duties of preventing material irregularities. Once the accounting officer replied and the AGSA is not satisfied by the action taken, the AGSA moves onto the next stage, which includes recommendations of what appropriate action must be taken. If the recommended action is not implemented, the third stage of binding remedial action becomes applicable. The third stage requires the AGSA to ensure the remedial action is implemented. Failing this, a certificate of debt is issued to the accounting officer in a personal capacity. The certificate of debt assigns liability to the accounting officer for the financial losses the provincial department suffered because of its employment, even after being repeatedly advised on which steps to take to remedy the situation.

Mr Marota outlined the way forward by providing a timeframe. In April 2020, the AGSA identified the material irregularities during the audit for the 2019/20 financial year. In May 2020, the accounting officers and authorities were notified of the material irregularities, and were given 20 working days to reply to actions taken and planned. In June 2020, the AGSA would have concluded if the accounting officers, the authorities’ responses, and the planned and taken measures, were appropriate. In July 2020, the AGSA would have included recommendations in its audit report on how the material irregularities should have been addressed, together with specified deadlines. By February 2021, the AGSA will follow up regarding if its recommendations were implemented. If it was not implemented, remedial action will be issued to the accounting officers and authorities with specified deadlines. By July 2021, the AGSA will follow up with the accounting officers and authorities to determine if its remedial action was implemented. If it was not implemented, a notice of intention to issue a certificate of debt to the accounting officers and authorities will be issued. The accounting officers and authorities will then be required to submit written reasons as to why the AGSA must not issue a certificate of debt. This process is scheduled to be completed by the end of October 2021, depending on the circumstances and submissions received.

The Chairperson said the Committee will engage with the National Prosecuting Authority (NPA), the Special Investigating Unit (SIU), and the Asset Forfeiture Unit (AFU), in its next meeting, to get an update on the causes of delays in prosecuting the wrongdoers involved. The meeting was adjourned.