National Treasury Audit Outcomes & 2019/20 Annual Report, with Deputy Minister

Meeting report

The Chairperson welcomed everyone in attendance and remarked on the loss of Members in the NA, NCOP and staff of Parliament over the past year. He requested Members to observe a moment of silence in remembrance of the colleagues that have passed on.

[This was duly observed].

The Committee Secretariat noted an apology from Mr E Buthelezi (IFP).

Briefing by the Office of the Auditor General South Africa (AGSA)
 
Mr Solly Segooa, Corporate Executive, AGSA, shared opening remarks and confirmed that all the audits have been completed.

Mr Polani Sokombela, Business Executive, AGSA, stated that the audit outcomes of the finance portfolio have improved slightly over the past five years. The number of unqualified audits with no findings have improved by 13% compared to the prior year. This is due to 3 entities, namely, the Financial Intelligence Centre (FIC), the Office of the Ombud for Financial Services Providers (FAIS Ombud), and the Development Bank of Southern Africa (DBSA), which addressed the prior year’s audit findings. The audit outcomes of NT, the Public Investment Corporation (PIC), South African Revenue Services (SARS), Land Bank Life Insurance Company (LBLIC), Government Pensions Administration Agency (GPAA), Government Technical Advisory Centre (GTAC), and the Financial and Fiscal Commission (FFC) have remained unchanged with an unqualified audit opinion with findings on compliance with legislation or predetermined objectives.

The audit outcomes of the Land Bank (LB), Co-operative Banks Development Agency (CBDA) and the Land Bank Insurance Company (LBIC) have regressed. The LB regressed from unqualified audit opinion with findings to a disclaimer of opinion, due to several issues such as its liquidity challenges, the exodus of key management personnel in the institution, and poor management of the loan book. These are recurring issues and have worsened in the past 3 years, until a disclaimer had to be issued. The control environment weaknesses, which are most notable in the management of the indirect book by its Service Level Partners (SLAs), that resulted in a disclaimer have been communicated to the bank before. The CBDA regressed from an unqualified audit opinion with findings to a qualified audit opinion. The LBIC regressed from an unqualified audit with no findings to unqualified with findings due to material findings of the audit of pre-determined objectives and material non-compliance with laws and regulations.

Mr Sokombela highlighted the outcomes of key entities. NT’s audit findings on non-compliance with legislation related to areas like expenditure management, procurement and contract management. There were also material misstatements in the financial statements. Treasury incurred irregular expenditure of R249 million and fruitless and wasteful expenditure of R67.6 million in the current year. The R67 million is expenditure incurred for annual technical support and maintenance on the software licenses purchased in 2016/17 for the implementation of the Integrated Financial Management Systems (IFMS 2). This technical support and maintenance was paid but the services were not utilised as the implementation of this project is delayed due to various governance challenges as mentioned herein. A lack of a formal business case and programme charter, proper project management, insufficient resources and limited Steering Committee meetings relating to the IFMS programme may result in failure to deliver the overall quality solution on time and with the funds allocated,

The quality of financial materials submitted by the PIC have improved. However, there were findings of non-compliance, with policies, guidelines and procedures relating to Assets under Management (AuM), and non-compliance with Treasury’s instruction note regarding procurement. The GPAA audit findings are Material non-compliance relating to procurement and contract management, expenditure management and consequence management. Recurring challenges are GPAA’s failure to finalise disciplinary action timeously or the failure to take action against transgressions by officials, and the vacancies in key management positions. DBSA’s audit outcome improvement is linked to its effective internal controls, with its strong governance and oversight over credit risk management, and assets & liability management. Its net cash generated from operating activities decreased by 4.8%, due to increased expected credit losses in the Bank’s development loan book. This is associated with the difficult economic conditions, volatile commodity prices and the anticipated impact of COVID-19 on some of its key clients. The non-compliance in SARS related to expenditure management, as it did not have adequate preventative controls to prevent the re-occurrence of irregular expenditure. However, the detective controls implemented were adequate to identify and disclose the irregular expenditure incurred in the financial statements.

Mr Sokombela elaborated on the credibility of financial reporting and performance reporting for the entities under the Finance Portfolio. He highlighted the top five non-compliance areas, the status of internal control for all the entities concerned, and the assurance provided at each level. An assessment of the financial health of the entities shows that Intervention is required in LB following material uncertainty. LB had a deficit of R2.4 billion in the past year. Other Areas of concern are the deficits in the LBIC and LBLIC, the losses made in the LBIC and the negative cash operating activities in both subsidiaries. The total for fruitless and wasteful expenditure in the portfolio was R149 million, with NT and LB being the biggest contributors. Irregular expenditure over 2 years totalled R1.38 billion, with LB being the main contributor. There has been a significant regression in supply chain management, with only 3 entities having no findings. Lastly, Mr Sokombela elaborated on some of the root causes identified and the AGSA’s recommendations to the Committee.

Discussion
Ms P Abrahams (ANC) asked why there was a delay with issuing the audit opinion, that resulted in last year’s Budgetary Review & Recommendations Reports (BRRR) not being presented to the Committee. She expressed concern over the entities with audit outcomes that have regressed, especially the LB outcome and the lack of credit controls in PIC. She requested clarity on the Land Bank’s liquidity challenges and what is being referred to with the Land Bank Insurance (LBI). Are there still vacancies at high levels in the GPAA? She requested more information on DBSA’s past audit performance and its sustainability.

Mr Seegoa replied that the delay in issuing the audit opinion on NT was due to a disagreement and dispute resolution process regarding the fruitless and wasteful expenditure on the IFMS project.

Mr Sokombela explained that LB does not have money to pay its liabilities. It has over R40 billion of debt, and has defaulted on its debt repayments. Other factors have also contributed to LB’s liquidity challenges. The challenges in the agricultural sector and the ability to generate income in the bond market, have impacted its cashflow. LB has two subsidiaries, the Land Bank Insurance Company (LBIC) and Land Bank Life Insurance Company (LBLIC). LBLIC provides life insurance and LBIC provides short-term insurance to farmers. The instability at GPAA has not been addressed as there are still many executive roles filled in an acting capacity, such as the Chief Executive role. 

Ms Sangeeta Kallen, Deputy Business Executive, AGSA, explained that in 2020 there was non-compliance in local content and supply chain management that resulted in DBSA no longer receiving a clean audit. However, prior to this DBSA had a clean audit. It has good financial standing, financial controls and risk management which contribute to its sustainability. Additionally, DBSA’s restructuring has led to the realignment of its strategies to the mandates of relevant sectors.

Ms Zimbini Manxilana, Auditor, AGSA, added that the willingness of managers to follow through with audit outcomes speaks to sustainability as well. The attitudes of managers and the audit committee towards improving the entity and implementing audit opinion action plans, shows an ability for the entity to improve annually.

Mr Nicholas Mokoena, Senior Manager, AGSA, stated that the main concerns with PIC has been its credit risk management and lack of adequate systems to monitor this, which poses the risk of not being able to recover.

Ms M Mabiletsa (ANC) stressed that the Auditor General has done its job in identifying problems and it is the responsibility of entities to commit to resolve the problems identified. She encouraged entities to take responsibility and implement audit action plans.

Mr F Shivambu (EFF) requested more historical and contextual information on the IFMS project, and why it continues to be an area of concern. He asked that the exact amount of money that has been spent on the IFMS project thus far be disclosed. He remarked that Treasury cannot afford to have fruitless and wasteful expenditure, as it should be setting an example for other departments. The Committee needs to deal with the sustained issues of the PIC, and give clearer guidance.

Mr Segooa replied that the IFMS project involved a 2016 contract for software licenses. The contract contained two components, the cost of licenses (an upfront payment made in 2016) and the cost of maintenance and support (about R67-9 million to be paid annually for 5 years). The contract ends in April 2021.

Mr Sokombela elaborated on the background of the IFMS project. At the time, government budgeted R4 billion for the IFMS project, and State Information Technology Agency (SITA) was responsible for the development and implementation of the system. Due to SITA project management and capacity issues, cabinet made a decision in 2013/14 for the IFMS project to be changed from IFMS 1 to IFMS 2. NT took the lead in 2015/16 to manage the IFMS 2 project as opposed to simply being a funder like in IFMS 1. A project management office was then established in Treasury, which planned to finalize the system within 5 years. The AGSA questioned Treasury’s decision to buy licenses in 2016 when it only planned to utilise them in August 2017 for its pilot test. The maintenance and tech support was not used at all in 2016/17 and so it was classified as fruitless and wasteful expenditure. NT disputed this and it was taken to independent evaluators who confirmed that it was fruitless and wasteful expenditure. The AGSA informed Treasury that it would evaluate the expenditure on the contract annually, against its project plan milestones. In 2017/18, it was still not being utilised and therefore classified as fruitless and wasteful expenditure. AG observed that the milestones of the project were not being met, the business case was not approved and the project steering committee was not meeting regularly. Again in 2018/19, the AGSA evaluated the R67 million paid for tech support and found that NT derives no value from this. NT disputed this finding and the same issue came about again in 2019/20. The Director General has since instituted an investigation on the IFMS project, to which the forensic investigation report concluded that it was fruitless and wasteful expenditure. Treasury is currently working on the consequence management recommendations in the forensic report. The AGSA is concerned because millions have been spent on the project, however, no system is in place.

The Chairperson suggested that a time be arranged for NT to brief the Committee on the IFMS project, with the attendance of the AGSA. In the same meeting, there should also be a briefing on the LB, as it has been recommended that the Committee raise its oversight on the LB.

Mr I Morolong (ANC) agreed with the Chairperson’s proposal. He proposed that the head of Information and Communication Technology (ICT) also attend to present a roadmap on how the project will be concluded.

Mr G Hill-Lewis (DA) asked if it would be better for the corporate governance of the Land Bank to operate like a real bank under the governance of the SARB instead of NT. This is not withstanding the internal failures of the LB that were highlighted. He remarked that the PIC audit outcomes are disturbing, such as the lack of basic checks on politically exposed people. He suggested the Committee request a formal response from PIC’s management and board on these outcomes. The software license contract is not fruitless expenditure, as it is an expense taken in good faith. It only became obsolete after a change in circumstances. The intent and procedure at the time of expenditure should be tested, not afterwards.

Ms Manxilana agreed that it could provide more scrutiny if the LB was to operate as a commercial bank. She pointed out that even though it is not a commercial bank, there are Financial Sector Regulations Act areas that it complies with, such as the FICA act and JSE listing requirements. The JSE monitors the requirements on an ad hoc basis. The Banks Regulation Act requires the capital adequacy ratio, solvency ratios and non-performing loans ratios to be followed. The LB voluntarily follows these ratios and are disclosed in its financial statements. It uses these to procure from external markets. She welcomed the opportunity to return and present further on the LB.

Mr Hill-Lewis asked if the LB always complies with the National Credit Act (NCA). A great deal of the current problems of the bank relate to lending to clients who would not otherwise qualify for debt under the NCA, leading to much higher non-performing loans.

The Chairperson pleaded with the Deputy Minister, to handle financial reporting issues in the stipulated time so as to not interrupt Parliament’s schedule, as the Committee is now behind on its BRRR schedule with NT.

Briefing by National Treasury
Mr David Masondo, Deputy Minister of Finance, apologised for the delay in finalising the financial statements and reassured Members that it would not happen again. He highlighted the importance of the AGSA and agreed with the Chairperson’s proposal for NT to return and speak on the LB and the IFMS project. He noted the concern around vacancies in the Department. The DDG position for Assets and Liabilities in the Budget Office, and interviews were held for the DDG position in the Procurement Office, however, no suitable candidate was found. Treasury is working hard to ensure all senior positions are occupied. Government has also advertised for the senior positions in GPAA,

The Department has spent 97% of the appropriated budget in the 2019/20 period. The Deputy Minister confirmed the audit outcomes that were presented.  

Mr Dondo Mogajane, Director General (DG), NT, stated that the Department achieved 83.33% of its performance indicators, with a non-achievement of 16.67% comprised of 15 partially achieved indicators and 5 indicators not achieved. He elaborated on the country’s weak economic outlook that persisted in 2019/20 and was compounded by the COVID-19 pandemic. The NT has redoubled its efforts to stabilise State Owned Companies (SOCs), exercising exacting oversight to better enable these institutions to contribute to government’s developmental objectives in a financially and fiscally sustainable manner. The contraction in public finances continues to exert pressure on government’s ability to balance the need for public services with constraints in public resources. This required and will continue to demand prioritisation of public service delivery, strengthening of responsive public administration, reduction in the cost of the public service and value for money programme decision making.

Ms Laura Msesme, Chief Director: Strategic Planning, Monitoring and Evaluation, NT, highlighted the Department’s quarterly and annual performance, indicating the total number of achieved, partially achieved and not achieved performance targets for each programme. Programme 6: International Financial Relations and Programme 7: Civil Military Pensions, Contribution to Funds & Other Benefits achieved 100% of the performance targets for the year. Programme 1: Administration, achieved 66.7% with the remainder partially achieved. Programme 2: Economic Policy, Tax, Financial Regulation & Research achieved 91.67% with the remainder not achieved. Programme 3: Public Finance & Budget Management achieved 85.19% with the remainder partially achieved. Programme 4: Asset & Liability Management achieved 71.43% of indicators, with 21.43% partially achieved and 7.14% not achieved. Programme 5: Financial Accounting & Supply Chain Management Systems achieved 84.38% of indicators and 6.25% were partially achieved and 9.38% were not achieved. Included in the non-achievement is the non-development of the functional and technical specifications of the IFMS system. Lastly, programme 8: Technical Support & Development Finance Programme Management achieved 77.78% of indicators, with the remainder partially achieved.

Regarding Treasury’s human capital targets, NT achieved a vacancy rate of 11.8% and the demographics are mostly representative of country’s demographics. However, the total staff compliment of persons with disabilities continues to underperform.

Ms Priya Lutchman, CFO, NT, highlighted the actual spending outcomes for each economic classification and programme, compared to the budget amounts. Overall, there was underspending of R857.6 million, with the compensation of employees being the main contributor due to vacancies.

The audit findings identified material misstatements in the annual performance report submitted for auditing. These material misstatements were in the reported performance information of Programme 4: Asset and Liability Management for 2 indicators. This is mainly as a result of a formula error included in the supporting schedules prepared by management to calculate the number of days required to perform these reviews. As management subsequently corrected the misstatements, AGSA did not raise any material findings on the usefulness and reliability of the reported performance information.

Ms Mseme confirmed and elaborated on the Department’s audit report outcome and findings. She pointed out the Department’s progress in reducing irregular expenditure. The Department is in the process of finalising condonation of irregular expenditure amounting to R241.7 million, and has since condoned R83.05 million of irregular expenditure.

Lastly, Ms Lutchman elaborated on Treasuries remedial action to the audit findings, following the development of an Audit Action Plan (AAP). A special committee comprised of senior officials, has been established and is operational to oversee the implementation and progress of the AAP. 

Discussion
Mr Hill-Lewis stated that Mr Mogajane’s statement that “Treasury is implementing exacting oversight over the entities it is responsible for” is not true, given the collapse of the LB and the PIC being guilty of corporate concerns. NT should take some responsibility over the entities it is conducting oversight over. He requested Treasury to table the performance contracts of the Senior Management Service (SMS) team. Which members of the SMS team received performance bonuses in light of the missed targets missed. Is GTAC being removed from NT to a different department?

Mr Mogajane replied that the role of NT in performing oversight over entities like the LB is limited due to several factors such as the existence of boards in the entities, the stipulated responsibilities of the boards and how the Ministry is structured. The relationship is also governed by the shareholder’s compact. Treasury has engaged with the boards several times purely regarding financial matters. The Minister has direct oversight over the PIC and not Treasury, when it comes to decisions on actions to be taken, how monies are invested and other financial responsibilities. However, the concern is noted and Treasury will continue placing pressure and bringing attention to issue that arise with the boards. GTAC is still a part of NT and has its own separate reporting arrangements and auditing process.

Ms Mseme explained that NT has a planning ecosystem where planning happens at the Chief Director level, with a specific operational plan for all 64 Chief Directors in Treasury. Within that system there is divisional planning, programme planning, the Annual Performance Plans (APP) and the Medium Term Expenditure Framework (MTEF). There is also an annual plan to assist with implementing the 5 year MTEF. The APP is reflected in the operational plan of each division and its contents become the key performance areas of focus for the Deputy Director Generals (DDGs). The performance of a DDG is made up of a review of all their chief directors and audit findings. This ensures that the reporting of NT is taken to the lowest level possible. Monitoring links each tier to the tier above. There have been no performance bonuses issued in NT for the 2019/20 period. She added that GTAC has matured beyond being an APP component within Treasury, to one that develops its own APP and has its own audit findings since a year ago. Only the reporting and auditing have been separated.

Ms Mabiletsa asked what is going to happen with the unachieved targets in Programme 5, especially regarding the training of 333 municipal officials out of the planned 1000. When will the remaining officials be trained?

Ms Mseme replied that the annual financial statements for national departments, public entities and Reconstruction Development Programme (RDP) underperformed due to late submission of audits. The reason for underperformance in training municipal officials is due to fewer learning outcomes endorsed by Local Government Sector Education Training Authority (LGSETA). This impacted the number of learning programmes that could be conducted.

Mr G Skosana (ANC) commended the 83% overall achievement and high appropriation of the budget. However, the challenges of fruitless and wasteful expenditure of about R249 million, and irregular expenditure in NT are a poor sign. NT should lead other departments by example on matters of finance. The unachieved target when it comes to employed persons with disabilities should be an area of focus. How effective is the special committee of senior officials dealing the audit action plan?

Deputy Minister Masondo agreed with Members that NT needs to lead by example and reassured the Committee that it is taking the concerns raised seriously. 

Ms Mseme stated that the effectiveness of the special committee is evident in the decrease in irregular expenditure by 25% each year. There are still repeat audit findings however there has been a decreasing in repeat findings as well. There are systemic reasons for some of the findings and NT is attending to this by paying specific attention to supply chain management, information technology (IT) and contract transfers. Treasury has been underrepresented in terms of persons with disabilities for a while and it is an area of concern. NT is putting in place processes to encourage recruitment of persons with disabilities. 

Ms Abrahams asked if there have been consequences for wrong doing, after the revamping of the contract management challenge. Do the senior officials in the audit action plan committee account monthly or quarterly? What does the Office of the Chief Procurement Officer (OCPO) do? Has there been any progress in process of commercial banks assisting communities in fund dispersal? Were previous glitches addressed regarding this matter?

Mr Mogajane explained that the credit guarantee scheme is not money from NT. It’s a tool that is part of the rescue package announced by the President last year. It is a scheme administered by banks based on a set criteria. NT has been advocating for the resources to be more accessible to assist businesses impacted by the pandemic and on the brink of failure. The criteria and thresholds that were initially set by banks have been subsequently changed to ease access to the resources. These are not grants but loans being given by banks, therefore, the enforcement of some form of criteria is expected for risk mitigation. NT is only guaranteeing the loans.

Ms Mseme assured Members that there has been consequent management regarding contracts. These cases come to the office of the DG for review, and in a number of cases the DG has requested increased severity in consequences. The audit action plan committee meets quarterly, however, NT will urge for it to meet monthly. The OCPO is responsible for the standards set & the compliance standards around public procurement across the spheres of government. 

Mr Morolong asked how the boards of the entities NT is responsible to conduct oversight over, are reporting to the Minister of Finance. What is the timeframe for the Minister resolving issues with the board of PIC and the Independent Regulatory Board for Auditors (IRBA)?

Mr Mogajane replied that the method of reporting by boards follows the stipulated regulatory framework. Treasury can lift some of the issues so the Chairperson can engage with the Minister on them from an informed position and hold the boards accountable. 

The Chairperson requested NT for more information on any progress in establishing a State Bank.

Deputy Minister Masondo replied that the memorandum on the establishment of a state bank is ready. However, the Ministry had to have a meeting with the Department of Communications that is currently working on the Post Bank Bill that is to be published soon. The meeting was held 2 weeks ago to address the department’s concerns and to ensure that parallel processes are not being run. The memorandum will be submitted. 

Mr Hill-Lewis requested details on the performance agreements and key performance areas (KPAs). He asked for a briefing on the appointment of the new Chief Financial Officer, Ms Lutchman, who was previously suspended due to allegations of tender irregularities of R43 million. Did Ms Lutchman not declare the charges against her when she applied for the job at Treasury? If not, this would be a material omission on her part.

Mr Mogajane replied that the Treasury was only made aware of the allegations after Ms Lutchman was appointed. She is aware of the human resource (HR) processes that include fact verification, file transfers regarding any wrong doings and the institution of disciplinary measures. Thereafter, appropriate actions will be taken. Treasury cannot suspend her immediately. Fair labour processes have to be followed, in consultation with Treasury’s lawyers. If any challenges arise, the Committee will be informed.

Ms Abrahams asked for more clarity on the credit guarantee scheme. Is it true that there was an amount set aside for relief for small businesses by banks?

Mr Mogajane explained that the credit guarantee scheme is separate from the small business development fund managed by the Department of Small Business Development. There is also a similar fund in the Department of Tourism to support small businesses. Treasury can check for more information and respond to the question in writing.

Closing remarks

The Chairperson, in closing, expressed concern over the poor economic performance and business failures occurring all over the country, such as the closing of Greyhound. He thanked everyone in attendance.

The meeting was adjourned.