ARC, OBP & ITB Quarterly Performance; with Minister

Meeting report

In the absence of the Chairperson, Mr N Capa (ANC) nominated Ms B Tshwete(ANC) as acting Chairperson, and was seconded by Ms N Mahlo (ANC)

The Chairperson said that September was Heritage Month, which meant much to the Committee. She hoped it would align its core business with celebrating Heritage Month regarding land tenure rights and labour tenants' issues, which were still outstanding.

She invited the Minister to make opening remarks before she was excused, as she had other businesses to attend.

Minister’s opening remarks

Ms Thoko Didiza, Minister of Agriculture, Land Reform and Rural Development, thanked the Committee for giving the Agricultural Research Council (ARC), Onderstepoort Biological Products (OBP) and the Ingonyama Trust Board (ITB) the opportunity to present their last quarter and first quarter reports.

She said the foot and mouth disease (FMD) vaccine would feature in the ARC and the OBP presentation. There had been issues of strengthening the facilities to ramp up the production of these vaccines. There were still challenges, particularly on the Genetically Modified Organism (GMO) facilities that were still being dealt with by the OBP in particular.

Regarding the Ingonyama Trust Board, she said there were issues with which the Committee had always been grappling regarding accountability, and she hoped that members of the ITB would take the Committee through these issues, and also indicate the impact of the latest judgment on the board’s performance had been.

One of the anomalies concerning the ITB was finalising the board. They had been impacted by the issues that had been happening in the royal house, particularly as they related to the trustees, given that part of the consultations in the appointment of the board would have to include the trustee and the chairperson, as well as the House of Traditional Leaders in the province, and the Premier who had been affected by the recent changes.

She felt that it was important for her to flag those issues in the context of the presentations being made by the three entities.

Agricultural Research Council (ARC) Quarterly Performance

Ms Jolene Isaac, Chairperson of the ARC, said that the Council had a new chief executive officer (CEO) and chief financial officer (CFO). The targets achieved by the Council were the highest for the last three to four years. The institutional review was complete, and the Council had accepted the recommendations that the CEO would expound upon. The audit outcomes had been negative, which was quite disappointing, but the Council was giving it serious attention. The external outcome remained under pressure, but it was better than last year.

They had appointed service providers at the highest level for the FMD project, and the stakeholder relations were improving. The stakeholder management remained key going forward.

Dr Litha Magingxa, President and CEO, ARC, said that quarter four and quarter one represented a transition period from a leadership perspective. The Council would be addressing some of the performance during that transition period. They would also be sharing the progress in terms of the audit environment, as well as where the Council had reached. They would also share the status of the work on the construction of the FMD facility.

He clarified the Council’s mandate in science, including innovation, research, applied research, and generation of intellectual assets through its capacity from highly skilled scientists and engineers. He said that these duties were what produced the outcomes in agricultural development. Therefore, from an audit perspective, the Council was audited only on its mandate as a science Council, because these were measurable outputs which led to the outcomes in the agricultural priorities.

Looking at the Council’s quarter four performance, he said it was clear that the Council had improved from the previous year regarding its measurable targets. That performance had also been analysed to consider the reasons related to challenges. The Council had gone beyond that to look at the previous five years, which showed that the research and development (R&D) division had achieved the second highest performance over the last five years, reaching 77% of its targets for the year.

Straddling the two past quarters was the institutional review, a legislated process conducted once every five years by science councils. The institutional review had just been completed, and was now being prepared for submission through the governance process. Since including the Minister, the Council had already done its work, and management had started an implementation plan on the recommendations flowing from the process.

He said that the institutional review process had considered whether the ARC was still achieving its mandate. The findings were that the ARC was achieving its mandate, but there was definite room for improvement, and the areas for such improvement had been identified. There were 18 recommendations from the review covering several themes, including mandate governance and the science part.

The Council would also be addressing the audit which had just been completed, even though it fell outside the first quarter, as it had been completed at the end of July, which was a negative outcome for the ARC because it was qualified. The key areas for qualification were related to the fixed assets of the ARC. The management of the ARC property portfolio had been challenging. There were also other areas he would consider less complex, like the calculations relating to the provision of legal costs and other matters. There was also a finding related to transactions that were incorrectly classified as irregular expenditure, which they were not. The ARC management had already put together an audit improvement plan. They were going to the audit and risk committee in the next few days with the plan before going before the Council for final approval.

There were other issues over the period that had proved challenging for the ARC. Over the medium term expenditure framework (MTEF) period that ended in 2018, there had been a series of reductions in allocations for the ARC, estimated at around R240 million. Over the last few years, that has created constraints for the ARC in terms of a number of programmes, working with partners, purchasing specialised equipment, maintaining infrastructure, and recruiting critical skills within the organisation. The savings which would be referred to in the presentation were because of delayed spending, particularly in the side of recruiting critical skills. Revenue generation was also constrained, and this, combined with the reduced allocation and external revenue efforts -- keeping in mind that research was a long-term undertaking requiring long-term sustained investment -- took away the ability to produce critical knowledge products that would support the sector.

They had identified other areas, such as the efficiency perspective that the Council was working on, such as the scanning electron microscope (SEM) area, where the Council already had a turnaround plan that had already gone all the way to the Council. All that remained was the implementation. Another factor that had influenced the negative audit opinion was the property management, but they now had a property management strategy that sought to determine how the department would manage property and identify the viability of certain properties, and where partners could be sought, including industry partners, to manage these properties and use them for the benefit of the sector. This was being prioritised so that the Council could run an efficient operation that benefited the sector across the country.

Dr Hilton Vergotine, General Manager: Risk and Planning, ARC, said that in the 2021/22 financial year, there were 73 reportable output indicators and targets, but only 51 for the fourth quarter, meaning that there were achievements in the prior quarters. In the fourth quarter, the ARC had achieved 65% of its targets, and 35% had not been met, while in 2021, 58% of targets were met. Before COVID-19, the ARC was meeting 83% of its targets.

Mr Abdul Carim, Chief Financial Officer (CFO),  ARC, said that the report had been completed prior to the finalisation of the end year statements, so the numbers being presented were unaudited. In terms of the indicators on the favourable and unfavourable, there had been no movement - just the actual numbers would vary slightly from what would be reported.

There was a surplus of R65.5 million, which was a result of delayed spending. There were savings on personnel and operational costs to the tune of 110 million. The ARC had deposited R800 million because the FMD facility had been delayed, and almost R500 million was related to the parliamentary grant specifically for the FMD facility. As a result, the ARC's cash flow was R331 million positive for the year. The ARC was solvent to the tune of R7 million.

He said that the ARC had not met its target for external income, which meant that it was eating into the parliamentary grant. They were trying to ensure that they kept their HR costs as a percentage of the parliamentary grant to 60 %. He said there was an issue between the ARC and the Department which was attended to by the CEO and the Director General (DG) of the Department.

In terms of the parliamentary grant, the ARC had slightly exceeded the income, which was of great concern. All of the indicators of the outcome had been than the budget. Their income related to the rentals and core business of the ARC stood at R86 million.

For the first quarter of 2022/23, there was a surplus of R118 million, but the biggest problem was that external income for the first quarter was worse than last year's. They hoped to claw back some of this income in the next three quarters. They were currently sitting at 65% below the budget for the current year, at R33 million.

Even though the ARC had funds of R480 million, it was due to the delay in the construction of the FMD facility. All the tenders had been awarded for the professional consultants, architects and engineers, and they hoped to be breaking ground at the site in the next quarter. It was anticipated that once started, the facility build would not take more than 18 months to complete. The biggest revenue for the ARC during the first quarter would be the parliamentary grant, followed by external income and other income.

The top expenditure items for the ARC included the costs of personnel and electricity. One of the ARC's biggest debtors was the Department, an issue they were resolving. The ARC ensured that it pays its creditors within 30 days per the Public Finance Management Act (PFMA). An amount of R101 million was sitting on the ARC balance sheet for the income received in advance, which was related to the ARC contracts.

Dr Magingxa indicated that the last time the ARC was before the Committee, they had mentioned FMD and what they were planning. The plan had been resuscitated and had all the high level technical service providers on board. He confirmed that they were on track. The deputy chairperson of the Council had been appointed as part of the task team which met regularly to discuss the progress of the FMD project, and they were progressing well. Meanwhile, the ARC was in the process of acquiring all the materials necessary to facilitate development of the vaccine.

Discussion

Ms Mahlo asked how the ARC planned on dealing with the dilapidated building and the financial impact that would have on the financial status of the ARC, including its assets, based on how it translated to building a capable and developmental state in which the state and its entities were placed at the centre of development of job creation.

She asked for the reasons for under-spending on capital expenditure, given that the capital expenditure could lead positively to the creation of jobs and opportunities, and the maintenance of existing jobs. She asked whether the process of appointing service providers was subject to the competitive best processes. The public would like to know about the process because irregularities are often associated with it.

Mr N Masipa (DA) raised concern over the uncoordinated manner in which the meeting had begun, following the absence of the Chairperson. There needed to be better coordination and a quorum in future.

He thanked the ARC for the update on the blood vaccines, because concerns were raised about the blood vaccines from OBP. He welcomed the progress on the FMD facility, and asked for a timeline on when the facility would be completed. He said concerns regarding finance were constantly being raised. He wondered whether the ARC was sustainable in the long run, and the lack of external income was also an issue. It was important for the ARC to take the Committee into its confidence as to what was being done to make sure that they addressed the financial issues, because the fiscus would not be able to fund the entity. He also asked how the ARC was planning to address the issue of personnel training.

Mr N Capa (ANC) asked what the essence of the problem on the fixed assets was. How could the ARC produce more critical skills, rather than recruiting them? He said that there had been reference to a marketing programme in previous meetings, and he had not heard anything about it, although it ought to be indicated somewhere as part of the ARC’s performance.

Ms T Mbabama (DA) said that despite the problems that ARC had reported on for quite a while, she felt the Committee should give the new management time. She had confidence in the CEO and was absolutely sure that he was the right person to head the organisation. Despite the big problems, she was confident that the new management would be able to turn the situation around. She asked why the ARC had difficulty in collecting external income.

Mr M Montwedi (EFF) asked for an update regarding the animal improvement scheme programme, because the Department had earlier alleged that the project had failed to take off because of a lack of support from the ARC. He wondered why the report had not included that information, which would have helped the Committee to understand the challenges ARC was facing.

The Acting Chairperson asked how the ARC intended to recover the money owed by the Department, and what the timeframes were. She was raising the issue because the Department was the ARC's biggest debtor, yet they expected the ARC to perform miracles in their core functions. She also asked whether the funds from the parliamentary grant were used for projects other than the FMD facility and, if so, the status of those projects.

She said ARC had made several commitments to operationalise its turnaround strategy for the commercialisation of the ARC, but there was no reference to this in the quarterly reports.

Ms T Mahlatsi (ANC) said that notwithstanding the challenges faced by the ARC, she was not too concerned over the fourth quarter performance precisely because of the challenges. There was expected to be some significant progress by the first quarter. When looking at the targets that had not been achieved, the reasons were still the same as the ones given in the fourth quarter. Given the general expectation of where the ARC would be at this point, what had been the bottlenecks preventing the ARC from achieving its targets?

During the Committee's visit to the ARC, they had indicated a number of challenges, but had said there were strategies that they were employing at the time to ensure that there was some sort of turnaround arrangement. She asked whether they had been able to apply those strategies to ensure as they moved toward the second and third quarters, there was significant improvement. She asked whether the ARC had been able to deal with the issues raised as far as litigation was concerned.

She said that the ARC had also indicated that part of the challenges they faced in meeting their targets was related to policies that needed to be reviewed. She asked whether the review had taken place, which specific policies they were working on, and how far the process was. Why was the ARC unable to meet the targets they had set themselves, and how would they be able to catch up in the following quarters? What were the financial implications of the strategies in place to catch up?

She told the CEO that as the Committee, they would want to see progress at the ARC. During their visit to the ARC, they had been disappointed, but had agreed in principle as a Committee that the ARC would be given the necessary support they expected. However, in return for this support, they expected to see results.

She sought reassurance from the ARC regarding its progress, challenges and measures in place to deal with the challenges, and the organisation's end goals.

ARC responses

Dr Magingxa said that what they were working with was a performance plan that the Committee would understand, and which would have been developed at a particular point in time and was usually completed before the end of the previous financial year.

The ARC had gone beyond ensuring they followed their own supply chain management (SCM) policies regarding openness, fairness and equitability. All the contracts, including the process itself, were subjected to a probity audit to verify everything was done correctly and ensure that nothing could jeopardise the project.

The timeline that the experts had given them for completing the FMD facility remained about two years, and in approximately three years, there should be a facility. There was progress, and they were hoping that the facility would be able to produce sufficient vaccines to meet the demand for the country and beyond, because they had been getting the vaccines in Botswana. The Botswana Vaccine Institute (BVI) was unable to meet the demand.

He said the ARC was in the process of having the feed lots programme handed over to them. The Minister had informed them that that was going to happen, and he had had a meeting with the Director-General (DG) in that regard. However, they were waiting for formal communication for the ARC to take over from the previous management by the National Agricultural Marketing Council (NAMC).

He said that the ARC had three key sources of external revenue. The first was policy contract research, the second was the diagnostic services they provide across the sector, and the third was capacity development domestically and internationally. Some properties earned the ARC rental income and royalty income from their plant breeder’s rights. Last year, they collected royalties totalling just over R20 million.

He said that he would find out what the feedback from the Department on the animal improvement scheme was, but their own records showed that more than 7 000 had participated in that project at the end of 2021, which was an improvement. This followed the finalisation of contracts and the appointment of the right people. There may have been challenges in moving things along, but he assessed that they had made progress.

Mr Carim referred to the entity's fixed assets. He said that the qualifications around the audit report centred on the ownership of some of the properties, because they were not registered in the name of the ARC -- they were still vested in the Department of Public Works and Infrastructure (DPWI), which they were trying to resolve. The second finding was the limitation of scope, where the Auditor General (AG) could not verify all the assets, and that was why they were outsourcing to complete the fixed asset registration and do recalculations on the impaired valuation. There were therefore issues around verification, valuation and the ownership of the fixed assets.

Dr Andrew Magadlela, Group Executive: Animal Sciences, said that the ARC produced the blood vaccines that were marketed by the OBP. They had a longstanding arrangement with the OBP whereby the ARC produces the vaccines while the OBP certifies whether they were the right quality. Once the certification was completed, the OBP paid the ARC a certain amount of money for the vaccines produced. The certification process sometimes took a bit of time, but the OBP was the only channel available for marketing the blood vaccines produced. He said that this was a legacy issue.

Dr Vergotinesaid that the commercialisation strategy was approved at the Council level, and there was a process that the ARC had outlined. The next step was to formalise an application on the set-up to streamline the process in terms of research output so that they could work towards commercialisation.

Follow-up questions

The Chairperson said that she had raised the issue of the Department owing the ARC more than R21 million, which she felt had not been answered. There was also a question about the government grants and other projects, aside from the FMD facility.

Ms Mahlatsi said that the ARC had not responded to the governance issues that she had raised, which she insisted were linked to the viability of the ARC itself.

Mr Masipa said that issue of the ARC assets involved the entity sitting with pieces of land across the country. He asked how much of the ARC’s land had been invaded, and what they were doing about it. These pieces of land were a source of revenue creation for them. One of the ARC’s land parcels had been the subject of media scrutiny in the last couple of months regarding evictions on that farm, and he asked how they were handling that matter.

The Chairperson asked that the ARC submit the answers to the outstanding questions to Committee in writing by Friday due to time constraints.

Dr Magingxa said that the ARC had actually presented a full report on land invasions in general to the Council. On the Citrusdal matter, the ARC was working there with a farmer who was going to use the facility. This farmer had dealt with soft citrus. This formed part of the innovative strategy plan to use their properties to develop the sector. The people in the media talking about this particular facility were not the people working in the facility. The ARC was working with the local municipality to assist some of the people occupying a part of the farm. The ARC was making efforts to do what was right at the facility, and once this had been done, they could give a full report to the principals. They were aware of the sensitive nature of the issue of land management and were dealing with the matter accordingly. The biggest cost associated with these properties was the cost of security. They were struggling with the cost of securing some of the land parcels, and where they were unable to secure them, they looked for suitable partners.

On the FMD facility, he said he had responded to the question.

He assured the Committee that between himself and the DG, they had found a better way of working together. They were not overly concerned about the debt they owed, as they looked into how to resolve the issues between the Department and the ARC. The amount owed had been significantly reduced to R5 million. The Department had confirmed that there was going to be an easier way of transferring funds directly from the Department to the entity. There would be no need to continue with the testing of Section 217. They were required from an audit perspective to reflect debt. They were working with the Department on how to resolve those issues.

He asked Ms Mahlatsi to provide the specifics of what she wanted the ARC to explain in terms of governance structures. They were willing to respond properly in writing to her questions to provide the clarity sought.

Ingonyama Trust Board Quarterly Performance

Mr Vela Mngwengwe, CEO, Ingonyama Trust Board (ITB), reported that for the fourth quarter, they had failed to meet their targets for the training of traditional councils and the approval of tenure rights.

Mr Siyamdumisa Vilakazi, CFO, ITB, said that the ITB had a deficit of R4 million in the fourth quarter, which they attributed to the late transfer of funds by the Trust to cover operational shortfalls.

For the first quarter, there had been underspending due to fewer board sittings, and they had continued to incur deficits due to insufficient spending. Ultimately there had not been much of an improvement from the fourth to the first quarter.

See presentation for further details

Discussion

Ms Mbabama said she would not address the presentation as she felt there was nothing to discuss. It was disappointing as usual. There had been no change, and in fact, the situation had continued to worsen over the years. She asked what the CEO saw for the future of the Ingonyama Trust Board. She asked what plans were being made to pay back the money taken from innocent people in rental income, especially residential leases. She asked whether the CEO felt that they had the necessary records to identify each and every victim and repay the money as directed by the court.

She was of the opinion that the issues that she could have raised regarding the presentation would have been better addressed by the Minister.

Ms Mahlo sought clarity on the difference between the Trust and the board. Which of the two had signed agreements with the entities referred to by the CFO? She asked what the transfer for the Ingonyama Trust meant, since the ITB had not met most of its targets. Why was the ITB the only one receiving a transfer in the last quarter of the financial year?

She asked who was making the presentation between the Trust and the board. She was of the opinion that the ITB was undermining the Committee by insinuating that the Committee was not aware of the legislation they had been formulated under.

The Chairperson responded to Ms Mahlo, saying that there was a trustee and a board that had been established for the administration of the land under the Ingonyama Trust. The entity that was supposed to account before the Committee was not the trustee, but the board.

Mr Capa asked for the name of the current trustee of the Ingonyama Trust. What was the understanding of the board on the implications of the court ruling mentioned by the CEO? He said that he would reserve his opinion on the presentation.

Ms Mahlatsi said that she would not address the presentation, as it left a lot to be desired. One could make appraisals from the fact that the audit outcome had improved. She said the Committee had belaboured on issues involving the ITB for some time, but had not been able to deal with the biggest issue -- whether the institution was sustainable in the long run. She recalled the CEO stating that it would not be sustainable due to the Trust's limited resources. She said resources had been appropriated to the Trust , whose job was to deal with the administrative matters which would assist in making sure that the board was able to oversee its work. She asked why the ITB had not been receiving enough applications. Why was the board not sitting regularly, considering that board sittings were regulated?

She asked whether the institution had a future over and above its relevance in the current democratic dispensation and whether government should continue to fund the institution when it was not performing. How did the ITB interpret its decline?

The Acting Chairperson also reserved her opinions on the presentation, because, according to her, it had been horrible. It did not give any insight to enable the Committee to perform its oversight function. It had been more of a repetition of the previous presentation made by the ITB. From the time they had begun presenting to the Committee, there had never been any headway made in training traditional leaders. There was no point in listening to their plans, as there was no accountability. The ITB had not presented anything substantive for the Committee to engage and ensure that it was accountable. She urged the Members of the Committee not to allow the ITB to continue in the manner in which they were behaving, as they had continuously failed to respond to questions raised or resolve any issues highlighted.

ITB's responses

Mr Sipho Ngwenya, Chairperson of the ITB, said that he heard the concerns of the Members. He responded that the future of the board, as currently crafted by legislation, was unique in itself, and that being a statutory body, it was up to those who made the laws of the country to resolve the question of the constitution of the board, as it was unusual for a trust to be administered by non-trustees. The future of the Trust was clear. It owned many assets sitting with the municipalities which, if optimally utilised, the Trust would not need a cent from the government. He said that the National Treasury owed the Trust billions in royalties which it had failed to pay, nor accounted for. 38 municipalities also used the Trust’s assets without making any payment to the Trust, so discussions along those lines must also occur.

The future of the national assets of the Zulu people in the form of land and its aligned resources did not depend on the people present before the Committee, but lay with the President as the head of the country, the Amakosi and the Zulu nation itself. He said that they come and go, but the Amakosi and the people would remain, therefore the question over the future of the Trust lay elsewhere. To the extent that there was the view that the ITB could be replicated elsewhere, he could not comment, because the land of similar people sat as state land with the Minister, and how that could be arranged was a process that belonged outside the ITB.

Regarding the leases, he said that the court case was currently the subject of appeal. Whatever the outcome, the Trust would remain liquid. The millions that Ms Mbabama had referred to was something the ITB did not know about. In the press, people talked about funds, while most leaseholders were defaulting. Secondly, the court had not set aside the leases which were some further issues forming the subject of the appeal at the supreme court. He said there were financial records of each lease, and records of every penny received and money that left the Trust. The frustration that the Committee was referring to was related only to the fact that the board, which was the entity, had only R24 million to oversee known public funds in the manner described under the PFMA.

The Trust was not subject to the PFMA. He wondered how the Committee expected the board to work with far less money to oversee a trust of that size.

Mr Ngwenya said that the ITB was not ducking or diving. Until 1999/2000, when it came into effect, the Trust reported directly or indirectly to Parliament. Under the PFMA, the board was described as a non-trading entity, yet the Trust was audited as if it was a trading entity. The board was not required to trade, but was treated as a trading entity. This was supposedly the concern of Members who vote on the budget of the entity in the manner they do, because every time a budget was presented of R40 million, it was quite clear that the difference of between R24 and R22 million came from the Trust, so that the public contributed towards the running of the board. He said that if the court set a cap on how the Trust generates income, how did the Committee expect the Trust to generate income because, as he had explained, royalties were sitting with National Treasury, and the municipalities were paying nothing? The Trust was being hamstrung while being expected to perform. Once the Committee had dealt with the questions he was raising, then it would realise that the Trust could sustain itself without any money from the government.

The Trust had one trustee -- Isilo -- the head of the Zulu nation. The board was an entity created by the PFMA, which in turn gave the Committee the responsibility of exercising oversight over the ITB regarding the R24 million. As the ITB repeats itself regularly, the reality was that they were accounting for the attempts that the board exercises, under very trying circumstances, for the Trust to function and get its resources back. Once it was able to get its resources back, the Trust had more revenue than anybody thought.

The President of the country had accepted who Isilo was. All that was outstanding was the official recognition, but cultural compliance had been done. The Isilo gets a stipend from the government, and government would act irregularly if a Member of Parliament was not aware that the Isilo was the one and only trustee at this stage. The revenue generated by the Trust also assists the board in discharging its function. He said that they had taken note of the comments by Members refusing to engage with the presentation.

Mr Ngwenya said the presentation was based on the ITB's annual performance plan (APP). Limited as it seemed, the frustration of Members regarding the presentation was not because it did not deal with the matters it was supposed to deal with. The reality was that the contradictions between the Trust and the board caused the Members to think that they were saying less than they were supposed to be saying. He agreed that they were indeed saying less, because they were talking about what the board could afford to do, based on available resources which were limited, therefore causing frustration.

He confirmed that there were records to identify the residential leases. Should the litigation get to a point where money had to be refunded, they would be in a position to know what must be paid and to whom. The board operated as a normal board and met as frequently as necessary, but there were specific meetings when the board met to deal with tenure matters, and that was when the applications were dealt with; it was only that type of sitting that had not happened in March, but the board had met to deal with other business. As far as meetings for tenure were concerned, there were only 59 applications that had been submitted if the board had met, which would not have meant that they were in a better position in the fourth quarter.

He understood the Committee's frustration, but he asked the Committee to be fair with respect to the issues. If one looked at the performance of the last financial year, it had improved compared to the past few financial years, and they would continue to try and improve.

He said there were ordinary applications that were commercial in nature, and residential leases. The residential leases turned out to be higher in number, so they would just bump up the number of applications the board had. Therefore, if one said one was suspending the processing of residential leases, of course, the number was going to go down, but it did not indicate that the other applications were no longer there as a consequence of the judgment. With the financial situation of the organisation, they sometimes encounter situations where even though they have applications that must be processed, they are unable to pay surveyors to come to the site. That particular situation existed between October and the end of the last financial year, so there had been a duty to commercialise applicants because of the lack of available resources.

He was not aware of any instability within the organisation. As far as he was aware, two board members had resigned towards the end of the term in 2019. The life of that particular board was due to end in July 2020. The Minister had extended the term by one month, until August 2020. He then appointed the current board as an interim board, which commenced in September 2020. At the beginning of 2022, there had been a call for applications for board membership because they were currently running with an interim board. There had been a mass resignation of management in 2020/21. The former CEO had served until the end of his term, and in June of last year, there was an acting CEO. The current CEO was on a fixed term contract. He was therefore unaware of the instability being referred to, as from his standpoint, nothing unusual had happened.

Onderstepoort Biological Products quarterly performance

Ms Rene Kenosi, Board Chairperson, Onderstepoort Biological Products (OBP), said that the entity had obtained an unqualified audit , which was ordinarily referred to as a clean audit for the 2021/22 financial year. From a strategic perspective, she said that genetically modified products (GMP) issue remained its biggest challenge, which they were currently litigating over. They anticipated that the matter would go to the high court to set aside the contract that was in dispute. Parallel to that, they had been in discussions with the Special Investigating Unit (SIU) regarding the registration of the matter for investigation.

Due to the limited number of members on the OBP board, they had had to use the current sub-committees to embark into other areas of the organisation, which included their sustainable energy and water production initiatives, and people management. The board had adopted a governance framework whereby they co-opt industry experts for round-table discussions about finding the best solutions for the OBP.

In the last quarter, their stakeholder relations improved with their various partners in terms of production. The specialised equipment used in production would take approximately two years from date of order to date of installation. They had approved the acquisition of a vector-proof facility and the freezer-dryer as the most critical equipment needed at the moment. The OBP had also entered into discussions over strategic partnerships for contract manufacturing so that when they were unable to produce vaccines, they had backup to assist them in their production.

There were challenges between March to May due to a moratorium over the supply chain management by National Treasury, so a lot of the procurement that was supposed to have taken place was delayed. However, as the fiscus did not fund the OBP, where there was under-spending, there was also a need for cost containment measures, affecting timing issues on the expenditure that needed to have occurred.

Ms Elspeth Govender, CFO: OBP, said that she would take the Committee through the quarter four and quarter one performances as two separate reports so that it could easily report on the progress achieved.

She reported that OBP’s net revenues had moved from R209 million to R190.5 million in 2022. They had anticipated a greater decrease, but fortunately, they had some product that had been sold to close the gap. There had been some production issues that they were working on, including preventative maintenance, as they had been sweating their assets for years.

The entity had achieved an unqualified clean audit, which was an achievement for the entity. It had achieved unqualified audits before with findings, but this was the first time it had outcomes with no findings.

In quarter 4 of 2021/22, the OBP's cost of sales was at 20%, which they were working on reducing to 13%. Their gross profit margin before interest, tax depreciation and amortisation was 10%, while their net profit margin was 3%. Their employee cost concerning revenue was sitting at 52%, which was significantly high, but they were aware that as a research and development institution, they needed the quality of personnel that would result in increased employee costs.

Ms Govender said the OBP had four programmes -- financial sustainability, continuous improvement of business, governance and leadership, and customer service.

Under financial sustainability, they had five output indicators and managed to achieve four of them. There had been a decline in the sale of vaccine doses due to competition in the market, which production interruptions had caused.

For the second programme, continuous improvement of business, the OBP had six output indicators, and had achieved three of them. The outcomes not achieved included revising the GMP roadmap and the vector proof facility, which she assured the Committee that they would achieve within this financial year. Regarding the GMP situation, the OBP was cognisant that legal matters took time, but they had taken steps to finalise the issue with the award to a certain supplier, which would hopefully allow them to progress with the GMP project by the third quarter. The OBP was waiting for legal clarification on the matter.

Under the third programme of customer service, OBP managed to achieve three out of the five targets set. There was an action plan in place to improve the communications in place on product availability. They had also found that one vacancy had caused some issues surrounding the follow-up on the feedback loop by customers, and though they had acted on their end, they had not resolved the complaints that had been received. However, those positions had since been filled.

The final programme was governance and leadership, where they had achieved two out of the five output indicators. Policies were currently under review, so they would soon achieve one of the remaining targets. Their culture survey implementation was in progress, and they hoped to achieve the percentage as intended. They had an HR resource that had been seconded to them by the Department, whose expertise would assist them in that area. They hoped to indicate better progress in the third quarter.

Ms Govender said that overall they had set 21 targets, of which they had achieved 12. For the remaining nine, the OBP had implemented action plans to help achieve them in the next reporting periods.

Turning to the first quarter’s performance, she said they had realised a profit of R21 million against a budget forecast of R5.1 million. This could be attributed to the sales of the FMD vaccine, but did not mean that most of their production issues had been resolved. Overall there had been a good performance in terms of revenue.

OBP continued with their four programmes. The first was financial sustainability, with five output indicators, of which they had achieved three. The second was continuous improvement of business processes, which had six indicators. It was an area they needed to continuously improve as they had achieved only two, not the four they had set out to achieve. The vector-proof facility target had been achieved, as they had awarded a tender. The roadmap had also been reviewed, and there was now a concerted effort to implement the plan. However, they still had delays with the GMP facility as they continued to wait for finalisation of the legal process. According to their targets, the OBP hoped to commence construction in the third quarter, which was subject to litigation.

On the third programme, customer service, the OBP had seven output indicators and had achieved six. They had fortunately achieved the outstanding targets in the second quarter through the training of farmers, and did not see any issues going forward because they were something they could control.

The final programme was governance and leadership. There were five output indicators, of which only two had been achieved. The OBP had put in place measures to ensure they achieve the remaining targets, some in the second quarter, and some in the third.

Ms Govender said that overall the OBP had set 23 targets for the year, of which 18 were specifically for the first quarter, and only 12 were achieved. She said there had been an improvement from the fourth to the first quarter.

Discussion

Mr Masipa said they had encountered issues concerning the freeze dryer that was not operational. He asked for an update on the condition of the dryer. The OBP had earlier indicated that their intellectual property (IP) had been stolen or used illegally by other private operators. He asked how the organisation was dealing with that issue. He also requested an update regarding issues the entity had had with a loss of money. He congratulated the OBP on the sales of the FMD vaccines and the efforts being made to procure vaccines for South African farmers.

The Chairperson commended the OBP for the improvement. She asked for an update on how far the OBP had gone in conducting investigations into the irregular acquisition of equipment for the GMP facility. She asked the OBP to take the Committee through how the cancellation of ISP contracts had affected their spending in the first and fourth quarters. The OBP had appointed an independent quality surveyor to validate the GMP project, and she wanted to know how far this had gone. She also asked for an update on the pending case regarding fraud and corruption allegations involving the former CEO, and if a new CEO had been appointed.

OBP's response

Ms Kenosi said that the former CEO had been dismissed in December, and the matter was currently before the Commission for Conciliation, Mediation and Arbitration (CCMA). The Commissioner had noted the delays, and given the parties three days in October to finalise the process. The entity's head of legal would address the matters to follow, which would be the civil action in terms of the recommendations in the report.

OBP embarked on the process of appointing a new CEO in April. However, they did not receive enough applications, and there was competition for talent in the market. They had since started a second process of appointing a new CEO, which included a headhunting process.

Regarding the freeze dryer, she responded that there had been an outcry over animal horse sickness following the Committee's visit. They had serviced the dryer, but it had caused problems for the horse vaccine. They had managed to get out of the undertaking they had given to the industry on what they would be able to produce by the end of June. They had to get a service provider from Spain who had helped them on the freeze dryer, but due to the heat wave, people had gone on leave and had to delay that process. The board had since approved the procurement of a new freeze dryer, which would take two years. She assured the Committee that they were trying to find alternatives, including contract manufacturers.

Adv Pieter van der Sandt, Head: Legal and Company Secretary, OBP, said the previous CEO had been dismissed in December 2021. As expected, the CEO and another employee had taken OBP to the CCMA. Unfortunately, the matter had been dragging along due to intentional delays by the former employees. At the last sitting, the Commissioner had instructed their advocate to bring all his witnesses and finalise their case within three days. As the legal unit, they were also working with external advisors to draw up legal documents for the recovery of money wasted at the hands of the former CEO and the other employee. This would take the form of a civil procedure in the courts. They were also considering the possibility of criminal investigations against the former CEO and the other employee.

Regarding the GMP facility, Mr Van der Sandt said they were currently in a litigation dispute against the initial project leader, DEC. The DEC contract and the International Steel Fabricators (ISF) contracts were intrinsically weaved together, which meant that they could not proceed with the ISF contract before they had dealt with the DEC contract. They had so far informed DEC that the contracts had been terminated, so the next thing was for the OBP to approach the high court and set the tender award aside. He explained that if the award was set aside, the court would order that no agreement ever came into place between OBP and DEC, and that would mean that DEC would have to repay all the money they had received from the OBP from the date of inception of the contract to the time it ended.

Regarding ISF, they were working quite closely with them to determine if they could continue with the project whilst DEC had been removed. He further explained that DEC had been the principal of the project, and had been responsible for drawing up plans, so part of the litigation process involved getting the initial plans for phases one, two and three from them to continue with the project. ISF had indicated to the OBP that once those plans were available, they could continue with the construction process.

Mr Luvuyo Mabombo, Interim CEO, said that OBP was engaging the original equipment manufacturers of the freezer dryers to get an expert to come down, but was also doing remote diagnosis and fixing the dryers. He confirmed that the board had approved the purchase of a new freeze dryer, which would take 12 months to manufacture according to the order, which had to be preceded by a contract. OBP was also engaging private sector partners who could contract to manufacture for them concerning their freeze dry products.

He said they followed a legal process with one identified competitor regarding their IP. To pursue this, they were sharing lawyers with the ARC, because their technologies emanate from the research that takes place at the ARC. They collaborated with the ARC to ensure that the IP of OBP was protected. Apart from the one IP they had identified, they were six other IPs that they suspected had been taken from their premises. They had corresponded with the regulator for the registration of animal vaccines. He said it was time for them to "stop playing nice."

When OBP put together the GMP project, they had deferred their responsibility to a service provider, ISF, who had bought the equipment on their behalf. He explained that the machine had two parts yet to be fully assembled. They were waiting on the manufacturer to complete the manufacture of the second part, and were yet to complete payment -- they had only made a deposit so far. They had given an undertaking to the Reserve Bank that the equipment needed would be brought into the country within 18 months.

Mr Mabombo said that the heartwater vaccine, anaplasmosis and redwater vaccines were currently undergoing quality control processes, and they were hoping to make them available as soon as possible. The vaccines would be available in October. He confirmed that they had contracted a quality surveying company that had completed a report based on that report and that they were proceeding carefully with the litigation process concerning GMP.

Chairperson's closure

The Chairperson thanked all the Members for participating and the different entities for their presentations.

She proposed that the Minister come before the Committee to address the issues regarding the Ingonyama Trust Board on a date convenient to all parties.

Ms Masipa seconded the motion for a meeting with the Minister concerning the Ingonyama Trust Board as soon as possible.

The meeting was adjourned.