Local Government Sector Education & Training Authority: Annual Report 2012

Higher Education, Science and Innovation

27 February 2013
Chairperson: Adv I Malale (ANC)
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Meeting Summary

The Local Government Sector Education and Training Authority (LGSETA) was asked to explain the reasons why, in the 2011/12 financial year, after a series of unqualified reports, the Auditor-General (AG) had issued a disclaimer. The Board Members, as well as the Chief Executive Officer, tried to explain how this arose. The Board Chair had ascribed most of the problems to difficulties that the Board had experienced in the change-over from old to new board, although the newer Board members explained that there was a poor working relationship among the former Board. The financial statements and Annual Report were submitted late and several inaccuracies were found by the Auditor-General (AG).  The training statistics for this year were outlined. The LGSETA had apparently attempted to address the disclaimer by appointing a temporary Chief Financial Officer, Human Resources and Corporate Managers, all for six months, and had taken on another eighteen temporary staff. It was working with National Treasury and the Auditor-General (AG) to regularise and condone the irregular expenditure. The main reasons for the disclaimer was the re-appointment of the Development Bank of Southern Africa for training interventions, which the AG regarded as irregular expenditure. Although the LGSETA had itself identified only R300 000 of irregular expenditure, the AG had identified another R39 million.

Members asked several questions as to why the Board was not working as a cohesive unit, the concerns around the Chairperson, why an interim Chair was appointed, and the current working relationships. Members wanted to know exactly how the Board intended to address the problems. They were particularly concerned that nobody had yet been held responsible for the irregularities, despite the specific requirements of the Public Finance Management Act and insisted that a full investigation be undertaken and the Committee advised of any disciplinary action taken. They were not happy with the initial comments on how the irregular expenditure arose, nor the comment that it was not disclosed timeously, questioning who had approved and recommended the amounts, and saying that it was of major concern that there was not proper accounting for public money. They were also not happy that the Chief Executive Officer did not have the full details with her. Members also questioned on what basis bonuses were paid, asked if they had been paid in the 2011/12 year, and how the provision for bonuses (which were in fact not paid) was calculated. Members were also scathing of the fact that there was over- or under-statement of various budget, income and expenditure items, and felt that no proper explanation was given, and questioned several instances. They heard the assertion of various Board members that the LGSETA would not again get a disclaimer but were not so sure that this might not happen, and asked what consequences would attach. Members made the point that many of the current Board had been acting also in this period, and questioned why the Ministerial representatives had not taken action and reported the problems. Some Members thought the Minister should disband the Board and put the SETA under administration, but it was later noted that the Minister had given the SETA six months to put itself in order, failing which this kind of action would probably be taken. Members were not happy with the explanation that the problems arose when there was no Chief Executive Officer in place, saying that if the systems were properly formulated and followed, this should not have happened, and felt that the Committee was still not being told of the real reasons for the problems. The Committee said that the role of the Department of Higher Education and Training in relation to this SETA would be debated later, and urged the Board and administration to sort itself out within one month, saying also that if it had not changed its accounting practices already, it must meet with the AG within the next three days. The Committee was adamant that it would not countenance further disclaimers nor allow such lack of accountability and would convey the Committee’s expectations for full responsibility to the Minister and Department.

Meeting report

 

Local Government Sector Education & Training Authority: Annual Report 2011/2012
The Chairperson noted that the Local Government Sector Education & Training Authority (LGSETA) had obtained a disclaimer from the Auditor-General (AG) and this Committee needed to be told of the reasons.

Mr Duma Nkosi, Chairperson, LGSETA, summarised that the SETA was in attendance at the last meeting but had requested time to engage with the Department of Higher Education and Training (DHET or the Department) and the Minister before presenting this report to the Committee. The Annual Report had been circulated but there were problems with late submission.

He noted that the LGSETA had struggled with the change over in constitution of the new board from the old, with challenges in getting the board fully constituted, the delegation framework, organisational design, compliance and performance, coordination of the board, committee management and administration. The Board still faced serious challenges in getting established and functioning.

Ms Ntombenhle Nkosi, Chief Executive Officer, LGSETA, again summarised the late submission and said that there had been formal engagement with the DHET in November 2012 to work on areas of underperformance. The result was that SETA was placed under section 14 supervision, which, she explained, was an instruction from the Minister that the SETA must correct areas of non compliance.

She outlined that the SETA was trying to follow the correct governance processes by holding meetings of the Board and its structures. The majority of the Board members were appointed in September 2011. Late submission of the Annual Report was one of the main challenges.

She gave a high-level summary of the Annual Report, noting that the SETA contributed to the delivery of Government Outcome 5, with the DHET, and Government Outcome 9, with the Department of Cooperative Governance and Traditional Affairs (COGTA). The SETA trained local government officials in finance, in line with the competency framework required by National Treasury, and it had registered 552 artisan learners, and assisted municipalities, in achieving blue and green drop status, by training 1 795 Water Process Controllers.

The LGSETA provided bursaries on various critical skill areas, including Ichthyology with Rhodes University, which was explained as the main marine resource development that contributed to rural development. It had supported 86 interns in Horticulture and Nature Conservation.

Achievements in areas of priority in the scarce skills high level within the SETA and sectors were outlined. LGSETA had given induction training to 7 498 councillors, trained councillors and officials in the Municipal Finance Management Act (MFMA). There were currently 27 interns in the property valuer qualification course, which was key in the sector to ensure proper evaluation of property by municipalities. 220 learnerships were offered in internal auditing. It had awarded 20 bursaries and internships in urban and regional planning. There were 11 interns, and 25 bursaries offered in the engineering field. Artisans in electrical engineering had been working on contract with Development Bank of Southern Africa. It was also working directly with municipalities on training 332 artisans. In the finance area, clerks in municipalities were trained on the Local Government Accounting Certificate, in collaboration with the South African Institute of Chartered Accountants. It was also training Water Plant operators, Road Builders, and offered 500 learnerships and 300 learnerships respectively in drainage, sewerage and stormwater operations.

He outlined the strategic focus areas of local government, stressing that rural development was a national imperative. The SETA awarded discretionary grants, with a focus on 108 rural and vulnerable municipalities as identified by COGTA. In addition, there were 23 vulnerable districts where particular emphasis was being placed on water and waste water treatment operations, through learnerships and skills programmes.

Marine resource management training began at OR Tambo, but had been extended to the coastal municipalities of Port St Johns, Port Nolloth, Richtersveld, Eden, and Saldanha, where training was done in collaboration with Rhodes University.

Most previous Higher Education contractual agreements had ended, or would shortly end. Each programme had produced about 100 trainees.

Mr Nkosi said that the Chairperson had correctly noted that although the LGSETA had an unqualified audit in previous years, it received a disclaimer in the 2011/12 year. It had taken steps to address this. It had employed an Acting Chief Financial Officer, for six months, as well as temporary Human Resources (HR) and Corporate managers for the same period, and 18 temporary additional staff. The organisational design was being revised and this was awaiting Board approval. The delegations had also been revised and were waiting for Board approval. The HR policies were revised and were at different levels of consultations.

LGSETA was working closely with the AG to avoid another disclaimer. A meeting would be held with National Treasury (NT) to finalise condonation of irregular expenditure, which was the result of training interventions. He explained that DBSA had been approached in 2009, as it was already involved in the programme Siyenza Manje, but the AG found the grant of R60 million to DBSA to be irregular expenditure. LGSETA had been working with the National Treasury to identify whether it should have been a private-public initiative instead. A detailed action plan had been compiled to deal with audit findings on Supply Chain Management and audit findings on Human Resource matters.

The Board’s preliminary assessment of the LGSETA challenges were that it had failed to comply with the statutory obligations, had underperformed, that the Board had not been functioning as a cohesive unit, that management had underperformed and had failed to comply with auditing requirements.

Discussion
The Chairperson requested clarification on why the Board was not working as a cohesive unit.

Mr Nkosi answered that the Board was a cohesive unit in as far as the directives and structuring are concerned. Yet, in certain situations, the Board had allowed some relatively insignificant issues to consume too much time and the level of engagement did not assist in finding solutions. The Board did not want to bring disputes to the Committee, but there was still a lack of cohesion, and each individual had a measure of blame, to varying degrees.

The Chairperson requested clarification on the efficiency and capacity constraints, mentioned in the report, which prevented the SETA from executing its strategic mandate.

Mr Nkosi attempted to answer by referring to the points of coordination, the alignment of the Board and its committees’ management and administration, and to focus on what the Board should be undertaking. He could not refer to any specific points in the presentation, but ascribed the problems to general difficulty in managing the transition to the new Board and the need then to put in place building blocks of efficiency and effectiveness. 

The Chairperson then asked the CEO what the capacity constraints were, when they were experienced, when they were resolved, and, if they had not yet been resolved, the reasons for this.

Ms Nkosi explained that the lack of capacity resulted from the delay in finalisation of the restructuring programme that the LGSETA underwent in 2011. As part of that organisational restructuring, all vacant posts, except for that of the Chief Financial Officer, were frozen.

The Chairperson noted the business efficiencies and new controls the LGSETA intended to introduce to get the institution into shape, but asked for further elaboration on them.

Ms Nkosi highlighted the area of supply chain management as being particularly challenging. All controls had to be reformulated. Originally, everything was done in each of the six offices, but now all supply chain matters were centralised at the Head Office, under the Chief Financial Officer. This was an example of an improvement.

The Chairperson remarked that any irregular transactions must be disclosed. However, the LGSETA had only disclosed R300 000 as irregular itself, yet the AG discovered a total of R39 million irregular transactions. He asked which officials were responsible, pointing out that the Public Finance Management Act (PFMA) specified who was to be held responsible, and said the LGSETA must also disclose the companies and the amounts involved.

Ms Nkosi explained that the bulk of the irregular expenditure had emanated from the DBSA artisan contract. In addition, the National Skills Development Fund regulations made allowance for SETAs to appoint service or training providers, as institutes of sectoral occupational excellence. Such service providers were appointed according to the policy of the LGSETA, as approved by the Board. The DBSA contract was also approved by the Board.

The Chairperson felt the question was not answered properly. For both the DBSA and sectoral providers, a certain amount must have been offered. He asked who recommended these amounts. It was one thing for the Board to approve an amount, but the LGSETA must account to the nation.

Ms Nkosi detailed that the DBSA artisan contract was for an amount of R12 million in 2011/12 and R8.9 million in 2010/11. These amounts were carried over from the 2009 contract, and were recommended by the previous Chief Executive Officer. In terms of the water/waste water tender, the amount was R19 million. She maintained that she had given the necessary report to the AG, who claimed not to have received it.

The Chairperson asked which companies were involved. He noted that this Committee must interrogate the AG’s report fully. Those bearing the primary responsibility were the members of the LGSETA Board.

Ms Nkosi proceeded to list the companies involved in the R19 million tender as being Oricon SA, Mahube and a third Cape Town-based water training company. She did not have the full details with her but said that she would send them to the Committee.

The Chairperson commented that the LGSETA should have been fully prepared with all information. The Committee needed the information and it must be sent.

The Chairperson inquired about unapproved bonuses paid to senior management and selected regional heads. He noted the lack of an assessment on performance.

Ms Nkosi replied that those bonuses were for the 2010/11 period. She could not perform an assessment on the staff, and the previous CEO had left, thus the LGSETA performance reports were used.

The Chairperson asked where the performance report was that detailed goals and achievements for the financial year, as the AG was apparently unable to obtain such document.

Ms Nkosi explained that the bonuses related to the previous financial year, and there was a report for this year. The audit report and the LGSETA performance report done by the Department of Higher Education and Training were used with regard to awarding the bonuses.

The Chairperson noted that the report stated that the SETA did not, either deliberately or by omission, disclose the irregular transactions at the time of audit, and wanted an explanation as to the reasons for the non disclosure.

Ms Nkosi elucidated that the SETA was late in submitting some of the documents, and by the time some were sent, the AG’s time for submission had expired. However, she maintained that there was disclosure and substantial engagement with the issues, particularly in regard to the DBSA contract, although the AG still saw fit to term it as irregular expenditure.

The Chairperson returned again to the question of the bonuses. For the period under review there was an amount of R3.3 million for performance bonuses. He compared this to the 2009/10 amount of R1million. He requested that the Board provide clarity on how the bonuses were calculated and offered.

Ms Nkosi explained that the R3.3 million was a provision in the books of the LGSETA, and it was calculated using previous percentage points. The LGSETA had always paid up to 10% maximum in bonuses to its employees. The R3.3 million was used as a 10% provision at that time, and it appeared in the books as a provision for payment. It was not actually paid.

The Chairperson said it seemed that the SETA was not really sure of either its budget nor its expenditure. Page 49 of the report revealed understatements of specific amounts, and an explanation was needed on this.

Ms Nkosi answered that the Board had looked into the erroneous budget, finding that one of the figures had been transposed as a negative instead of a positive figure in the budget reconciliation.

The Chairperson was concerned that the revenue was understated by R5.4 million.

Ms Nkosi explained that it was an understatement because of the erroneous transposition of the figure as a negative figure.

The Chairperson asked if this also included the overstatement of the budget by R21.8 million.

Mr A Nel, Chief Financial Officer, LGSETA, explained that under the administration expenses, a budget figure of R36 million was shown on the income instead of expenses side. This then made it appear that there was an overstatement of R21.8 million.

The Chairperson challenged this as there were about six overstatements and understatements in the uncorrected statements. Thus, it was not the transposition of a single figure that was to blame. He cautioned that the officials from the LGSEA should not take the Members for granted. For instance, the Skills Development Levy income was understated by R136 000.

Ms Nkosi said that the overstatement in the budget was a separate figure. With regard to the material misstatements that were highlighted on page 49, these were under different line items. The Skills Development Levy income of R136 000 referred to income received in advance. For this reason, it had been stated as 2012/13 income by LGSETA, instead of 2011/12, but the Auditor General required it to be included in the latter financial year.

The Chairperson enquired about the employee expenditure cost, which was overstated by R7 000.

Ms Nkosi explained that LGSETA employees were allowed to receive a thirteenth cheque as a part of their package. This payment was charged every month by the financial system, but the amount was actually awarded to them in November, at which point it would be reversed by the financial system. That error had since been corrected in financial statements.

The Chairperson asked about the prepayments and advances of R139 000, and asked to whom the money was being given.

Ms Nkosi showed that the payments were rental payments made at the end of March for the month of April 2012.

The Chairperson questioned the assertion that the LGSETA was giving the AG its cooperation. He was worried that it was headed for another disclaimer.

Mr Nel said that essentially the previous year’s disclaimer emanated from the fact that the Auditor General did not receive documentation timeously. He assured the Committee that this year the SETA was sufficiently capacitated, with 18 additional employees, so that documents would be provided on time, and that a disclaimer should not recur.

The Chairperson noted that the officials did not even follow proper tender quotation procedures, and asked how the LGSETA could be so sure, and what consequences would follow, if the LGSETA did receive another disclaimer.

Mr Nkosi stressed the positive outcomes of the turnaround actions, yet he also acknowledged that the time frame of administrative intervention was delayed, so that he could not give a total commitment as to the audit result. He said that the relationships between the management and Auditor General’s office were crucial, and the Board had to ensure that communication was happening as it should, and that submissions and other issues were being handled correctly. He admitted that the LGSETA was not fully up to scratch in capacity and effectiveness. He was not suggesting that it was unable to do things, but there had been some delays at board level in making the interventions and giving full support to the management to manage all the detail of the processes.

Mr Nawa, new board member, LGSETA, wanted to speak to the cohesion of the board and whether the SETA would continue to underperform. The new Board members had discovered that there had been a power struggle within the Board. There were a good number of members who thought the Chairperson of the Board should retain this position, despite poor performance that affected the full functioning of the SETA. Recently, a Task Team had been working on punctuality issues, but the administration was generally employed full-time and was tasked with giving direction to the Board. If there was a suggestion of lack of performance, the Board could decide what steps should be taken. However it was a problem if the Board was at a situation where it could not work together as a cohesive unit. There was a clear sense of a rift in the past, between Chairperson and Board.

Mr B Bhanga (COPE) said that if this situation occurred in another country, the whole of the Board would probably be arrested. He bemoaned the fact that the poor and those at the grassroots level were not taken seriously by public servants. Those entrusted with stewardship over the nation’s money were not taking the public seriously. The chain of responsibility started with the Chairperson of the Board. Mr Nkosi should take responsibility because the Board had failed to exercise proper oversight over the activities of the institution. The AG had clearly stated that, in 2011/12, the LGSETA had mismanaged and misappropriated State funds. The majority of the Board members were all serving on the Board also in that period, and should take responsibility for what happened in that year. He was most upset that there had been no consequences imposed. The Public Finance Management Act had very clear provisions on people who, like the Chief Executive Officer, had been responsible when irregularities occurred. If the LGSETA was serious, it should have launched investigations, the Board should have been disbanded and the right people called in to take over the SETA. He felt that the Committee should recommend that exactly this type of decisive action must be taken, and that all those responsible must be investigated and arrested. This would include the beneficiaries of the irregular procurement process and the previous CEO. For too long had politicians remained silent in the face of such corruption.

Mr G Radebe (ANC) noted the lack of disciplinary measures taken by the public institution. The Board Chairperson spoke of a turnaround strategy in his report, but did not speak directly to the queries raised by the Auditor General. The PFMA specifically stated that the Accounting Authority should keep full and proper accounting records. The current report clearly showed that the Board could not even produce a single report when requested, so he doubted if the Board would be able to meet Members’ expectations. He recommended that the Minister or Department should take stringent measures against the LGSETA, disband the Board and put the institution under administration. The problems that were evident when the SETA first presented itself were still evident. If this continued, it would reflect negatively on this Committee also. Everyone who was found responsible, from previous and current management, must be taken to task. It was impossible for this Committee to engage meaningfully on the key issues as there was incompetence shown in regard to tender processes and record keeping.

Ms N Gina (ANC) asked the Board Chairperson how he saw the performance of the Board, and specifically what was the LGSETA’s real contribution to the skilling of the people of South Africa. She also enquired if value for money was obtained from the contracts undertaken.

Ms Gina also wanted to know the rationale behind employing the Chief Financial Officer and HR and Corporate managers for six months on an acting basis. These were vacant posts, and were not likely to be frozen.

Mr S Makhubele (ANC) expressed disappointment in the SETA, saying it did not meet with Members’ expectations. He wondered how for so many years it had obtained unqualified audits, then in 2011/12 suddenly regressed to a disclaimer. He would have expected the SETA t have had proper systems in place that would not allow for a qualified audit, and asked what had happened to the systems that were obviously there at one stage, and when exactly the challenges set in. The next question was what the Board did when the challenges became apparent. He did not think that the Board could hide behind the fact that the CFO post was vacant. It did not necessarily follow that regulations and proper processes were not followed when one individual was not present. He also wanted to know what the reason was for appointing an interim Chairperson. He felt that Members had not been fully appraised of what really was affecting proper working of the Board. Without the full information, this Committee could not engage with all the key issues and make informed recommendations.

Ms Gertruida Voigt, Board Member, LGSETA, said that the reason for making the interim Chair appointment was that the Chairperson was not always in attendance at the meetings. A Task Team was put in place to try to lessen the gaps between the administration and the Board, and it was also trying to ensure that the Board was doing what it should. A specialist for the Turnaround should be appointed within the next 15 days.

Mr L Bosman (DA) had the same concerns as Mr Makhubela as to why there was a sudden disclaimer in 2011/12. He commented that the public was tired of hearing about wasteful expenditure and the Committee must deal very strictly with this. He was also very concerned with the “disarray” apparent from the reconciliations of budget, income and expenditure, summarising that revenue was under-stated by  R5.4 million, expenses understated by R27.2 million and the surpluses overstated by R21.8 million. He questioned why there was not correct record-keeping. The irregular expenditure amounts were understated by R39.54 million, a huge amount of money that was not recorded.  He too wanted specific information on the reason for the collapse, whether any disciplinary or correctional actions were taken, and said that if they were, that information was not conveyed to the Committee.

Ms Voigt said that in regard to the irregular expenditure, the finance committee had decided that an internal audit would be done to investigate and, if wrongdoing was found, the necessary disciplinary steps would be taken.

Mr R Nomtkhuengu, new Board Member, LGSETA, said that he had only served on the board for one month. However, the last Board meeting had already agreed that corrective actions would be taken, including disciplinary steps, and it was expected that some of the corrective steps would start yielding results in the following week. In addition to Ms Voigt’s submission on the turnaround strategy that the Board had agreed upon, he said that the Minister had agreed that the situation must be rectified within a time period of six months. The Board would now be focusing on specific plans, execution and monitoring. The Board was also focusing on ensuring efficiency in its own and sub-committee activities so that there was full compliance, and this would deal with the issue of oversight. This was the mandate that the board had set for itself. It would communicate with the Minister. If nothing substantial had happened within that six months, decisive and instant interventions would be done at a higher level. The LGSETA would return to receiving unqualified audits.

Ms D Chili (ANC) wondered whether the SETA was satisfied that the new councillors were ready to take on their duties after induction, especially given the prevalent dissatisfaction in communities that was apparent when protests speaking out against government were held.

Ms N Sibiya (ANC) bemoaned the lack of information on whether there were investigations, and emphasised that investigations should have taken place and the responsible parties arrested.

Dr A Lotriet (DA) questioned whether the Board had executed its fiduciary mandate. There were Ministerial appointees on the board, and she asked why they had not intervened. She questioned how any of the turnaround strategies would succeed if there was no cooperation amongst the Board members. She agreed fully with Mr Makhubela's points and asked that the Committee must receive details about what was happening in the Board, as that was the crux of the matter.

Mr Makhubele inquired what exactly the DHET was supervising.

The Chairperson suggested that this question must stand over for another discussion with the DHET. He noted, however, that the Chief Financial Officer of the DHET must work with the LGSETA on monthly reconciliations, as suggested by the AG.

Mr Nkosi asked that the Committee also hear from the other members of the Board.

Mr Nawa said that there had been references to some Board members being newly appointed. It was very difficult for them to speak with accuracy about a SETA that was, prior to their appointment, under-performing. However, the new Board members had tried to make a concerted effort to operate well, when faced with the uncooperative environment which they had found on their appointment. There was a lack of effective interface between administration and the Board. There was an acknowledgement of underperformance, and this was the reason for the request to the Minister that the Board be given time to rectify the problem. The turnaround strategist would be looking to what went wrong. There was an undertaking to the Department to perform a full diagnostic audit. The Board now also had to reflect on itself, how past boards had dealt with matters, and what this Board had to do to prevent a recurrence of the circumstances, and that would include scrutinising the level of competency and capacity at Board level. This was especially pertinent since the LGSETA was a government entity. The organisation was not in a good state. The South African Local Government Association (SALGA) and COGTA had responsibility to ensure that the local government sector began to redeem itself and deliver on the objectives of the Constitution. The Board had identified, and had requested assistance to, engage and take opportunities to work with the Department in that regard.

The Chairperson reminded Members that the officials from LGSETA had indicated that in future there would be no more disclaimers. He recommended that if there was such a situation, the Minister must invoke section 15 of the Skills Development Act, resulting in any money in the LGSETA being transferred to the National Skills Fund, following prescribed procedures. Furthermore, the Minister should consider the appointment of an administrator in the event of another disclaimer.

In the meantime this Committee’s Members urged the Board to “shape up” within a month, although even that was quite a long period to allow the Board. The practice of procurements and transactions without quotations should have ceased. If it had not, then this Committee wanted the whole Board to meet with the office of the Auditor General within the next three days, to look into its position insofar as current processes were concerned. The Board must consider the most honourable steps to take and consider seriously whether Board members had correctly executed their fiduciary duties. The Committee would not be prepared to countenance lack of accountability, nor another disclaimer. He recommended that the Board review the PFMA provisions, front to back, concentrating on those that stated that Accounting Officers would be guilty of an offence if they failed in certain steps. The late submission of records took the form of the report being sent to the AG at midnight on 31 July 2012. The statements were indicative of careless, unrecorded spending of State funds during the year, and a subsequent failure to account for such expenditure. The Chairperson said that although there was talk of a turnaround specialist, the responsibility for turnaround lay firstly with the Board, then with the Chief Executive Officer. The Board must take responsibility. The Committee would communicate to the Department and Minister that action must be taken on this matter.

Mr Nkosi thanked the Committee Chairperson. He noted that there was no familial connection between himself and the CEO; their similar surname was coincidental. He noted that the Committee could request the registers of attendance at board meetings, to satisfy itself on the interim Chair appointment. All stakeholders had been part of the structure for a long time. The new Board members were appointed to try to resolve the difficulties of managing the transition. The Board was focusing on the turnaround and would ensure that the situation was rectified.

The meeting was adjourned.


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