Project Thusano and related matters: AGSA input, with Deputy Minister

Meeting report

Opening remarks

The Chairperson welcomed the Deputy Minister of Defence and Military Veterans, Mr Thabang Makwetla, the Auditor-General of South Africa (AGSA), the Department of Social Development (DSD), and Committee Members to the meeting. He said the Committee was going to receive a briefing by AGSA on its findings concerning the Department. He highlighted that the agenda had been amended to include a section on “The Status of Records Review for the Defence Portfolio Committee”. He said for this meeting the Minister or representatives from the Department were not obliged to respond to matters arising from the presentation. This was an opportunity for them to process the AGSA’s findings, and to respond to them in written form in a separate meeting. He then invited the Deputy Minister to pass his introductory remarks.

The Deputy Minister greeted everyone and expressed his gratitude for being invited to the meeting.

The Chairperson welcomed the Deputy Minister and proceeded to ask if DSD was happy with the amendments to the agenda.

The representative from the DSD replied that she was happy with the amendment and could still provide questions that arose from the Status of Records Review in written form to the Committee. She also pointed out that on 2 March, DSD presented an action plan for the Department on the outcomes of the audit that was done by the AGSA for the 2021/22 financial year. This plan was a reaction to matters arising on the Status of Records Review to be presented at the meeting.

The Chairperson welcomed DSD’s questions but advised that they had to be limited. He said a separate meeting was going to be arranged where these questions were to be given full attention. He acknowledged and accepted the apologies from the Minister of Defence and Military Veterans, Ms Thandi Modise, who was attending a cabinet meeting; Ms T Legwase (ANC) who was attending the Portfolio Committee on Home Affairs hearings; and Dr B Holomisa (UDM). He then invited the AGSA to make its introductory remarks.

Ms Mbali Tsotetsi, Deputy Business Executive, AGSA, greeted everyone in the meeting and said she was only joined by Mr Solomon Jiyana, Senior Audit Manager, AGSA. She suggested beginning with the presentation on Project Thusano then followed by the one on the Status of Records Review.

The Chairperson welcomed her suggestion and asked her to proceed with the presentations.

AGSA findings on Project Thusano

Ms Tsotetsi started with a brief background of Project Thusano. In 2012, the Department of Defence entered into a bilateral agreement with the government of the Republic of Cuba for defence cooperation. This agreement led to Project Thusano. Over the years the two governments entered into supplementary agreements to give effect to the overall bilateral agreement. Since 2014, the Department of Defence procured services through two main contracts of the bilateral agreements, and various supplementary agreements.

Work done on value for money audit

The AGSA planned to perform a value for money audit on Project Thusano in the 2019/20 financial year due to significant expenditure incurred on the project. Following the outbreak of the COVID-19 pandemic, President Cyril Ramaphosa declared a National State of Disaster on 15 March 2020. In this period, the South African Defence Force (SANDF) was deployed to assist the country’s efforts to manage the pandemic. As a result, the value for money audit was postponed to 2020/21.

In 2020/21 the AGSA resumed the process of auditing the contract TI 17-001 SUDAFRICA. This agreement was concerned with the provision of services in two main areas. These were training technicians in the organisation of transport technique and, repair and maintenance of transport technique assets. In the previous year, requests for information on the above focus areas were issued but none of the requested information was provided. The audit team, therefore, issued a finding and concluded on a limitation of scope. Efforts were made to obtain this information in the current year but still, it has not been provided.

The AGSA’s findings on the review of the procurement process

The Department procured services through two main contracts (TI-17-001-SUDAFRICA and TI-17-002-SUDAFRICA) and various supplementary agreements. The overall bilateral agreement stipulated that the relationship between the two parties had to be subject to each party’s domestic laws. However, it was discovered that the Department’s procurement process was not in line with Section 217 of the Constitution and also contravened Treasury Regulations 16A6.4 and National Treasury SCM Instruction No.3 of 2016/17. Based on these findings, the expenditure incurred under Project Thusano were deemed to be irregular.

The expenditure incurred under Operation Thusano was deemed to be irregular and the Department should disclose it as such in the annual financial statements. The expenditure incurred as at 31 December 2021 for goods and services under project Thusano amounted to R1 370 987 020.

Recommendations

The AGSA recommended Management to introduce measures that ensured that all deviations from the normal procurement processes were justified, adequately documented and approved by the Accounting Officer and/or National Treasury. It advised Management to quantify all project Thusano payments from supplementary agreements and to update the irregular expenditure register. Finally, it recommended the Accounting Officer take effective and appropriate steps against officials that permitted the irregular expenditure as required by the Public Finance Management Act (PFMA) and Treasury regulations.

(See Presentation)
 

Status of Records Review

The AGSA explained that the purpose of the Status of Records Review was to identify key areas of concern that had the potential to derail progress in preparation of financial and performance reports and compliance with relevant legislation which in turn could result in the regression of audit outcomes. This included assessing progress made in implementing action plans and follow through on commitments made in previous engagements, and identify matters that added value in implemented measures and action plans well in advance.

Key insights on focus areas: DOD

Oversight and monitoring    

The AGSA found that the Department has not implemented preventative controls and consequence measures to address the issue of the department’s employees doing business with the department and other state institutions in contravention of Public Service Regulation 13(c). There is a concern from the audit committee that the department has not taken appropriate actions to monitor the implementation of action plans to address internal control deficiencies and audit findings raised. After more than two years, the critical post of the chief audit executive has not yet been filled. The Internal Audit Division is still not sufficiently resourced relative to the size and nature of the department’s operations.

Financial Management

The Department did not establish adequate and sufficient internal controls to ensure that tangible asset registers were regularly updated and necessary adjustments made to these registers. In the 2020/21 audit, it was also found that the Department did not implement sufficient controls to monitor leave processing. Consequently, not all leave transactions were recorded. An action plan to address these issues was still being implemented. As a result, the auditing team could not verify the adequacy of the plan. The Department did not fully record irregular expenditure in the past three years, and this resulted in the qualification on completeness of irregular expenditure.

Procurement and contract management

In the previous year, the AGSA reported numerous audit findings relating to non-compliance with procurement and contract management legislation. Most action plans were still in progress and had a planned completion date of February 2022. Based on the audit team’s review of irregular expenditure registers and interim financial statements, the Department had already incurred irregular expenditure of R61.5 billion.

Compliance management

The balance of irregular expenditure that had not been dealt with in the interim financial statements amounted to R10.5 billion, while the balance of fruitless and wasteful expenditure amounted to R428 million. The Department had a total of 523 cases of irregular expenditure and 88 cases of fruitless and wasteful expenditure. Of these two, 10% had been finalised for fruitless and wasteful expenditure cases, and 16% for irregular expenditure cases. It was also found that in some instances where investigations were finalised, the Department failed to take disciplinary steps to recover losses.

Armaments Corporation of South Africa SOC as at 31 December 2021

The AGSA reported that the procurement of an ERP system to assist the collation of information from various legacy systems was not completed. This posed a risk of possible delays and errors. For procurement and contract management, it was found in the previous two years that single source suppliers were being approved as sole suppliers. The AGSA emphasised the importance of SCM officials having a clear understanding of the difference between the two as this posed another risk of irregular expenditure if there was no evidence of appropriate approval. Findings on compliance management were that Armscor incurred some irregular expenditure in the current year due to not following SCM processes for appointing single-source suppliers.

Key insights on focus areas: DMV

Oversight and monitoring

The internal audit unit was reported to be not adequately capacitated as there was currently only one employee. The Director of Internal Audit (DIA) was currently acting as the Chief Financial Officer (CFO). There was no official holding the position of the DIA. The audit team comprised of three members. However, the third member was suspended. As a result, the Department could no longer meet the requirements of Section 77(a) of the PFMA which required committees to consist of at least three persons.

Human resource management

The AGSA said the long-outstanding key vacancies had to be filled to address service delivery challenges. There were vacancies that were open since 2017.

Performance management

The Department has underachieved on its performance for the period 1 April 2021 to 31 December 2021. The department’s overall achievement on its performance objectives was recorded at 42%. For the socio-economic support programme, the department had planned for five targets for the third quarter and only one was achieved. The Department is currently in the process of determining the budget implications of fully implementing the policy for pensions and subsidised public transport. These two indicators were not budgeted for in the 2021- 22 financial year and the related planned targets have not been achieved.  The internal audit reports noted that for the reported performance information for quarter one, there were differences between the reported achievement and the supporting documentation.

Compliance management

The AGSA found that written warnings were issued to four of the affected officials and the rest of the 64 cases were provided to the external investigator. There were concerns that delays in concluding investigations could lead to non-compliance with the PFMA and Treasury regulation 4.1.2, which could result in negative audit outcomes.

Material irregularity (MI)

The AGSA identified numerous irregularities in the Department. Its investigation found that the inventory and asset management contract was not only awarded to the bidder that scored the highest points in the evaluation process. This was against the stipulations of the PFMA. Lease payments made for unoccupied office buildings were also identified. Again, this contravened Section 45(b) of the PFMA. This non- compliance resulted in a financial loss of R108.3 million. Other irregularities included the unfair award of the fuel contract which led to material financial loss worth R2.57 million. This contract was awarded to the supplier using an evaluation criterion that differed from the stipulated original request for quotations. Consequently, this resulted in high prices being paid for fuel.

In most instances, the Accounting Officer had not taken appropriate steps to address the MI and they have been escalated for the next step.

The AGSA suggested that the Committee follow up on progress and action taken for the MI, to evaluate the actions taken to prevent the MI from re-occurring and, to determine what action had been taken against those responsible for the MI and to monitor implementation of consequences and recovery losses.

Accelerated improvements in accountability

In the 2020-21 audit outcomes of national and provincial government, a general report was tabled with a theme centered on a call to all role players to accelerate improvements in accountability. The overall outcomes reflected “incremental improvement” in the national and provincial government audits, with an increase in the number of clean audits. However, it also recorded low levels of accountability among accounting officers and accounting authorities. For this reason, a culture of consequence management had to be enforced. There was also slow progress in the implementation of the audit action plans and lack of consequence management, which negatively affected the livelihoods of citizens. Finally, the AGSA stressed that the improvements it sought to achieve were not limited to accounting officers. They included all various role-players in the Department.

Recommendations

The AGSA recommended follow-ups on the MIs and for action to be taken against all implicated officials. It recommended that key audit issues reported in the status of records review be addressed. It advised the Department to ensure that it adequately implemented preventative controls and to conduct proper and timely investigations into all instances of irregular fruitless and wasteful expenditure and material irregularities to determine whether any official was liable for the expenditure, and to institute disciplinary action. For the Portfolio Committee, it advised monitoring on the implementation of action plans and preventative controls, and most importantly, the implementation of consequence management in relation to irregular, fruitless and wasteful expenditure.

Discussion

The Chairperson thanked the AGSA for the presentations. He said it was fortunate that members of the Department were present in the meeting to witness these findings. He then opened the meeting for discussion.

Mr S Marais (DA) asked for clarity on the various references given in the presentation that indicated that there was action still not taken. Did the AGSA receive any explanation for this, or was there any consequence management? He was also not clear what was meant by “next course of action”. What were these courses of action? In the cases referred to the prosecuting authorities concerning material irregularities, no recommendations and disciplinary actions had been taken. Did the prosecuting authorities refrain from making such recommendations?

Ms Tsotetsi replied that Mr Marais’s question was best responded to by the Department. The AGSA’s role was only to assess if consequence management had been implemented. Therefore, the Department had the answers as to why consequence management was outstanding for persons responsible for non-compliance. She indicated, however, that the AGSA had communicated with the Department that it was aware that investigations had been done but with no consequence management. The AGSA did not specify the next courses of action because it was waiting for the MI Committee to make a decision. The auditing team could make recommendations but the final decision on the right course of action was to be made by the MI Committee. She pointed out that the unfair awarding of the fuel contract was the only MI referred to the Directorate for Priority Crime Investigation. The AGSA had decided different courses of action based on the circumstances of each MI. The decision to refer was done after the AGSA team had assessed certain matters. For example, the auditing team could decide to refer if information at their disposal raised suspicions of criminal elements, or involvement of certain officials within the Department on that particular MI. In such instances, it would not recommend investigations to be conducted internally. Instead, it would refer the matter to an outside public body.

Mr Marais pointed out that the AGSA was known to be strict with Departments that did not respond to recommendations. For that reason, he asked if it was prepared to commit itself to when these decisions were going to be taken. This was because the cases presented by the AGSA team were reported on a yearly basis. It had become clear that the Department was taking its time to address these matters. Thus, there was a need for the AGSA to commit to these cases.

Ms Tsotetsi replied that the AGSA could not provide a definite timeline on when these matters were going to be finalised. However, in the following audit report, it was committed to sharing the next course of action because this information would have been communicated to it.

Mr Marais pointed out that there were noticeable differences between the report provided by the Department and the one presented by the AGSA. He asked if he could ask questions based on both reports.

The Chairperson suggested that Committee Members focus on the report presented by the AGSA and consider the one from the Department in the following meeting where the Minister would present it herself. In addition, he expressed disappointment about the Department’s late submission of the report. It was the second time this was happening.

Mr Marais agreed and said that the actions of the Department and its staff showed a lack of discipline. The late submissions of reports were totally unacceptable. It also seemed like the Department did not agree that it was accountable to the state, the AGSA and the Committee. Consequently, this reflected on the Committee in terms of making sure that the Department complied with the requirements. Decisions had to be made to ensure that the Department and its Accounting Officer did not constantly present “flimsy” work. According to the PFMA Section 38 (2), an Accounting Officer was not to commit a Department to any liability for which money had not been appropriated. This had become a recurring tendency of the Department and there was no evidence of consequence management. He also rejected “with the contempt” what the Department had presented about Project Thusano, and said he wished to send it back to the Department so that it could do better work on it. Consequence management had to be implemented to address such “flimsy work”.

Apart from this, he complimented the AGSA for the work it had done and asked for clarity on Project Thusano’s contracts. There were two main contracts and 10 supplementary ones. He pointed out that the medicine imported under these various contracts was against the principles of the two main contracts. Did the AGSA investigate these sub-contracts because there was a possibility that they deviated from the principles of Project Thusano? These sub-contracts had been mentioned in the past but no report had been done on them. The money allocated to the Department was another point of concern. The AGSA reported R1.3 billion yet the Department reported only R1 billion.

The Chairperson agreed with Mr Marais’s observations and said that the AGSA continuously called for information from the Department but with no success. He asked if the AGSA had written to the Minister informing her that in the last year the Department was qualified because of lack of information. He proposed that the AGSA write to the Minister and then copy the Committee in this letter.

Mr Marais asked if the AGSA had considered recommending that the contracts under Project Thusano be cancelled. Since the current contract was up to 2024, it meant that the next billion Rands were going to be part of material irregularity and wasteful expenditure.

The Chairperson responded that the AGSA had never asked any Department to cancel any contracts.

Mr Marais replied that it was evident that material irregularities were now a constant outcome in the Department.

The Chairperson said it was up to the Department to act on such issues. If it failed to do so the AGSA had to qualify it until it improved its performance.

Mr T Mmutle (ANC) asked if adopting the strategy proposed by the Chairperson transgressed the law that governed auditing and the Department to execute its responsibilities.

Ms Tsotetsi replied that the AGSA had not audited the 10 supplementary agreements in detail. In the past, focus of the auditing team was on the expenditure linked to the two main contracts; the one on the provision of professional services, and the one on the technical services. However, current work by the auditing team on the value for money was going to assist the AGSA to audit these agreements in greater detail. She explained that the R1.5 billion quoted by the auditing team was from the end of December 2021. The R1 billion quoted by the Department was possibly from the end of the financial year in March 2021. The AGSA wrote to the Minister in the 2020/21 financial year concerning information that was not provided by the Department. Still, this information was not provided and this was why the auditing team concluded with the limitation of scope. It was hoped that this would improve in the current year since discussions were held between the Department and the AGSA. 

She said there was nothing wrong with copying the Committee on the AGSA’s request to the Department. This had been done before when the AGSA was struggling to get information on Heberon drugs. It copied the Chairperson of the Portfolio Committee.

She further explained that the AGSA could not recommend the cancellation of contracts. Its recommendations were in line with the findings that it identified on what had to be done to deal with non-compliance, and to emphasise consequence management if there were irregularities. However, of the two main contracts, the one on professional services had a seven-year lifespan. It was possible that it had expired in 2021.

The Chairperson asked if the AGSA received any acknowledgement from the Minister after writing to her.

Ms Tsotetsi replied that there was no correspondence.

Mr Marais said although this request was sent to the previous Minister, Ms Nosiviwe Mapisa-Nqakula, the current office could provide an explanation why there was poor response.

The Chairperson said it was important to present this matter again to the current Minister. He also alluded to Mr Marais’s earlier observation that the two reports from the Department and the AGSA were inconsistent, and said it was hoped that in the next meeting with the Department these matters would have been clarified. He also said the Minister had to lead the following meeting as she was supposed to be at the centre of answering the questions. Before concluding the meeting, he asked the Deputy Minister to say his closing remarks.

Deputy Minister Makwetla thanked the Chairperson for inviting the Department to the meeting. The reports from the AGSA were a welcome intervention to assist oversight work in the Department. The Minister and the Auditor General had held a “very intense engagement”. In this long meeting, it was possible that the matters discussed in the Portfolio Committee meeting were covered. The matters raised in the report presented by the AGSA were going to be dealt with by the Council of Defence (COD). After that, the Minister would return to the Oversight Committee to address these issues. There were specific methods that needed to be followed in order to mitigate risks in advance. Therefore, failure to make those decisions could result in another problematic year. The report required a very clear policy guidance from the Department. The issue about the supply chain function was a very good example. It was still located within the logistics environment which was contrary to the requirements in National Treasury Regulations. Another example was the balance of irregular, wasteful and fruitless expenditure that had not been dealt with. It was concerning that only 10% of investigations had been done on fruitless and wasteful expenditure, and only 16% on irregular expenditure. Nonetheless, it was only at the level of the COD that the Department could advise management on how to bring about a change of environment. He acknowledged that there were issues concerning compliance management that were finalised but without any disciplinary action. Issues around oversight and monitoring were also concerning because the internal audit was not fully capacitated. The Director of Internal Audit was currently acting as the Chief Executive Officer.

The Chairperson thanked the Deputy Minister for his comments. He acknowledged his input that the report had to be processed by the COD first before being presented to the Committee. He suggested that after this process the Minister would present it to the Committee.

Deputy Minister Makwetla agreed.

The Chairperson explained that the Committee could not deal with the report because it was submitted late. This was disappointing and hampered the Committee’s oversight procedures and performance.  Nevertheless, after this meeting, the Department was in a position to present a better report because it benefitted from the AGSA’s report.

Mr Marais agreed with the Chairperson’s suggestions. He said the issues being raised about the Department had become repetitive and emphasised that the Committee’s stance to return the report back to the Department was the strongest way to respond to such underperformance. However, after reviewing the Department’s presentation, he asked if it was permissible to forward questions for matters that need clarity to the Secretary of the Department. This would help both the Committee and the Department to address these matters at the earliest possible time. In addition, the Department often lacked answers for questions posed to it by the Committee. It always responded by suggesting that it would get back to the Committee at a later stage with answers. Therefore, sending questions sooner as the Department was preparing its report could save time.

The Chairperson said sending questions for a report that was not presented pre-empted the report that the Department was yet to present.

Mr Marais agreed with the Chairperson but explained that often when the Department was asked questions about its report it hardly had answers. For that reason, sending questions beforehand could help the Department to properly prepare its report.

The Chairperson suggested that Mr Marais drafts his questions in line with the report from the AGSA.

Mr Marais agreed.

The Chairperson highlighted that there were two issues that had been referred back to the Department. The first was the report on fraud and corruption. He said by the time the meeting was scheduled these reports were supposed to have been reviewed by the Minister. He thanked the Deputy Minister and the AGSA team and said that the Committee was yet to officially write back to the Minister concerning the two issues he mentioned. Through this letter, he hoped to bring to the Minister’s attention that the AGSA wrote to the Department several times but with very little success. Overall, the Committee was not impressed by the performance of the Department.

Minutes

Minutes from 23 February 2022 adopted.

Minutes from 2 March 2022 adopted.

Closing remarks

The Chairperson thanked the Members of the Committee and support staff for their work.

The meeting was adjourned.