UIF & Compensation Fund: deviations, expansions, irregular, fruitless and wasteful expenditure, with Minister

Meeting report

Minutes

The Chairperson accepted apologies from Mr M Dirks (ANC) and Deputy Minister of Employment and Labour, Ms Boitumelo Moloi. He sharply criticised the delegation from the Compensation Fund (CF) for sending a revised version of its report to the Committee late the day before, not giving the Committee enough time to study it. The CF received a disclaimer from the Auditor-General for the fifth consecutive year, and the Unemployment Insurance Fund (UIF) also received a qualified audit opinion with findings in 2018/19, which was a regression from the previous year. He queried the absence of any members of the board of the UIF at the meeting.

Mr Thobile Lamati, Director-General, Department of Employment of Labour (DEL), said the Department was under the impression that the Committee had wanted the audit committee to be at the meeting.

The Chairperson said it was obvious that the Accounting Authority should be present at a meeting on irregular expenditure. He then asked the Minister of Employment and Labour, Mr Thulas Nxesi, to make some introductory remarks.

Minister Nxesi began by assuring the Committee that the DEL took the Committee’s oversight very seriously. He had met with the CF and UIF in preparation for this meeting. In brief, it emerged that advisory boards needed to be put in place, and there would need to be meetings to discuss some of the fundamental matters of governance. He conceded that there were systemic challenges. Root causes were inadequate Information and Communication technology (ICT) infrastructure and an over-reliance on consultants to perform specialised tasks. There was a need to review governance structures to ensure they provided greater value and oversight. The Commissioner had an action plan to address the Auditor-General’s negative findings. He stressed the matter of consequence management. There were many inherited problems going back at least to 1994.

Discussion – Compensation Fund

The Chairperson said the late submission of documents by the CF almost seemed like malicious compliance. It was becoming a trend, which was unacceptable.

Mr B Hadebe (ANC) pointed out a difference between the register of irregular expenditure send to the Committee the week before, and the revised register sent the day before - almost 200 cases listed as ‘not concluded’ in the former were listed as ‘to be written off’ in the latter. How had it happened that, directly before the meeting, the decision was taken to write off the cases?

Mr Lamati expressed surprise at the existence of the revised report.

Mr Thando Wababa, Office of the Ministry of Employment and Labour, said the CF sent two reports the week before. He received the revised report from the office of the Director-General the day before.

The Chairperson asked who sent it.

Mr Wababa said it was the parliamentary liaison officer.

The parliamentary liaison officer said she had sent it on Wednesday.

Mr Hadebe said that several cases (numbers 38, 48, 60, 92 and 100) were removed from the revised register. These cases all related to ICT contracts.

The Chairperson wanted to clarify the origin of the different versions of the register before getting into details. It was a matter of integrity. He asked Mr Wababa to show the Committee the email that led to him sending the revised document.

There was a delay while delegates tried to find the correspondence requested.

The Chairperson said the existence of missing cases in the revised document was a serious problem that formed part of a broad pattern. The meeting would not go ahead until it was resolved.

Mr Hadebe wanted to know the author of the revised document.

Minister Nxesi asked whether the session could be postponed while the Department found the correct information for the Committee. The missing cases were a critical matter and would not be swept under the carpet. The Department would deal with internal matters.

The Chairperson declined to postpone the session. The “paper trail” would be dealt with and the meeting would proceed.

Mr S Somyo (ANC, Chairperson of the Standing Committee on the Auditor-General) suggested giving the Department some time to get clarity.

The Chairperson said the matter was not only about the cases missing from the revised document but about the document as a whole.

Mr Hadebe added that the existence of two different documents raised the question of whether Members could ask questions about the cases omitted from the revised document. No action was taken against officials in any of these cases.

The Chairperson said the Committee needed to establish which document was the correct one and then establish why two documents were prepared and sent.

Ms N Tolashe (ANC) suggested the Department be given time to sort the matter out. Maybe neither document was correct.

The Chairperson said the Department simply needed to tell the Committee which document to use. If it was the first one, then there was a question of who revised a correct document. If the revisions were authorised, then the Committee would deal with the second one. In either case, the uncoordinated manner in which the matter was being dealt with was telling. He suggested a ten minute break. It was necessary to find out where the email behind the revised document came from.

Ms V Mente (EFF) said the owner of the document, that is, the Accounting Authority, should indicate which document he would take responsibility for.

The Chairperson noted this point but said the existence of two documents pointed to some mischief so it was important to get to the bottom of how the situation came about.

Mr A Lees (DA) agreed. He was concerned about wasting time, however. People trying to do business with the CF had faced its unavailable website for years. This was a real crisis.

Ms T Marawu (ATM) understood that the Director-General had distanced himself from the revised report. He said that he did not even know about the revised report.

The Chairperson accepted this, but pointed out the revised document was official correspondence, so it was important to know its origin.

The meeting reconvened after a ten minute break.

The Chairperson said the revised document was sent to Mr Wababa on 20 November, and forwarded to the Committee the day before the meeting (25 November). He asked Mr Vuyo Mafata (Commissioner, CF) whether he had revised the document.

Mr Mafata replied that the Chief Financial Officer (CFO) had done some minor cleanups on 20 November 2019.

The Chairperson wanted to know what caused the delay in getting the document to the Committee.

The parliamentary liaison officer repeated that she had sent it on Wednesday, 20 November 2019.

The Chairperson asked Mr Wababa why he said he only saw it the day before. He criticised the parties involved for not maintaining clear records of their communications.

Mr Hadebe said that several ICT related cases were removed from the register in the revised document. There were also cases where a write-off process was initiated but no amount was given. How much was being written off in these cases? In more than 100 cases, the names of the officials were not indicated. Were they still working in the Department? It was clear that no action was being taken and there was no consequence management. For instance, a Mr Pillay was cited five times, in cases amounting to millions of Rands, as having received consequence management. What was the nature of this consequence management that allowed him to continue with irregular expenditure?

The Chairperson said irregular expenditure would be parked. The fundamental matter was the presence of multiple documents. He wanted to focus on the cases that were omitted from the revised document.

Mr Hadebe drew attention to cases 38 and 48, involving the head of IT, worth R7.3m and R16.5m respectively. Who was the head of IT and what was the nature of the service?

Ms M Dunjwa (ANC, Chairperson of the Portfolio Committee on Employment and Labour) was concerned that the document was in question. Who was the author?

The Chairperson said the second document would be investigated.

Mr Thando Headbush, Chief Financial Officer, CF, said that case 38 was condoned in 2014. The contract was for a finance system, and payments were made without a formal contract. He stated the name of the head of IT at the time.

Mr Hadebe asked if consequence management were instituted against the head of IT.

Mr Lamati said there was no reason to open a matter that was condoned.

Mr Hadebe noted that the same company, Computron, was involved in cases 59 and 60, involving amounts or R7.9m and R7.4m, and so was the head of IT. No action was taken in these cases.

Mr Headbush explained separate payments were recorded as separate cases in the register. They were part of the same contract.

The Chairperson asked why it was on the register if it was condoned. Was it just a case of poor record management?

Mr Lamati replied that the template the Department followed required the inclusion of all cases.

The Chairperson noted the document did not say the cases were condoned, - it just said concluded. These were also the cases which were systematically removed from the revised document.

Mr Lamati replied that CF2 was comprehensive, while CF1 excluded finalised cases.

The Chairperson said this differentiation was not captured in the documents received.

Mr Hadebe asked why no action was taken in case 48. What was the nature of the contract?

Mr Headbush replied that the contract had been for ICT systems. The expenses had been condoned.

Mr Lamati added that case 48 had been reclassified following an investigation.

The Chairperson asked why.

Mr Lamati explained the investigation found that the process was correct, and missing documentation was found.

The Chairperson said this confirmed record management problems at the CF. The sudden reappearance of missing documents raised more questions than answers.

Mr Hadebe drew attention to case 92, which indicated no value, implicated the Supply Chain Management (SCM) directorate, and had been concluded.

Mr Headbush replied that case 92 was a duplicate of case 91 which arose because the Auditor-General had cited it in consecutive years.

The Chairperson asked why cases were being written off because of insufficient records.

Mr Lamati replied that the record management at the CF was a challenge. Where records were sufficient, cases were dealt with.

The Chairperson reminded the delegation that the CF received a disclaimer from the Auditor-General. He asked whether the internal audit committee was taken seriously.

Ms Lorraine Francois, chairperson: audit committee, CF, did not think the audit committee was taken seriously. It made several recommendations but had seen only minimal improvements. She recognised the complexity of the CF’s business but this did not excuse its failings.

The Chairperson did not accept complexity as an excuse. Was there sufficient consequence management at the CF?

Ms Francois said the audit committee did not think there was sufficient consequence management. It was raised but the response was not sufficient.

The Chairperson asked how long the Commissioner had been in his current position.

Mr Mafata said he had been the Commissioner for four years.

The Chairperson asked why the audit committee was not taken seriously.

Mr Mafata replied that the audit committee was taken seriously and many of its recommendations were being implemented.

Mr Hadebe read from page 77 of the Annual Report, directly contradicting Mr Mafata’s response.

The Chairperson agreed. The audit committee was clearly not being taken seriously.

Ms Tolashe did not accept the Commissioner’s response. For four years under his watch, the CF had received a disclaimer. The Commissioner should apologise for his response and the Minister should note it.

Mr Mafata apologised for his statement. He had not intended to disrespect the Committee. He said he inherited an institution without even the basic capacity to fulfil its financial and reporting obligations. The CF completed an action plan last year to bring in the necessary skills, and a second action plan aimed at restructuring the organisation.

The Chairperson was not satisfied with the response. There was five years of disclaimers. There was no headway on the action plan. The CF had found a haven in disclaimer, but it was not acceptable. If there was evidence that the CF was moving out of being disclaimed, it would almost be acceptable, but there was no such evidence.

Mr Somyo said that the CF seemed to be comfortable with its inadequate IT system. This sense of comfort was working against any fundamental change.

Ms Mente asked how many cases were dealt with, how much money was recovered and how many people were fired. She noted the Auditor-General always mentioned internal auditing in the disclaimer. Cases referred to the Commissioner by internal audit were not in the document.

Mr Hadebe said there was an over-reliance on consultants to do day-to-day financial discipline at the Fund. What was the role of the CFO and his department if consultants were doing day-to-day work? How much were consultants paid to produce such questionable financial statements?

The Chairperson added that the remarks from the audit committee in the Annual Report were a substantive summary of the mess at the CF.

Mr Mafata acknowledged the IT system for processing and paying claims was unreliable. A new system, which addressed many of the problems, went live in October. Many cases of irregular expenditure went back to previous years. The CF was not hiding anything. Whoever was implicated in wrongdoing would face the music. The lack of financial management skills had been indicated for many years.

Mr Hadebe observed that although the Commissioner claimed that implicated officials were acted against, cases were just condoned. Mr Pillay, for example, was implicated in six cases, but no action was taken against him.

The Chairperson agreed. There was no movement at the CF.

Ms Tolashe said the audit committee’s comments were the same as the Auditor-General’s comments. This showed the audit committee was not listened to. She was not satisfied with Mr Mafata’s responses.

The Chairperson asked if any dismissals took place at the CF.

An official from the CF replied that six officials were dismissed in connection with fraud in 2018/19, ranging from Deputy Director level downward.

The Chairperson said there was a lack of appreciation at the CF for the seriousness of a disclaimed audit opinion. He asked the Committee secretarial staff to look into continuing to engage with the CF in the evening. He invited the UIF to engage with the Committee.

Discussion – Unemployment Insurance Fund

Mr Teboho Maruping, Commissioner, UIF, said the UIF received a disclaimer in 2016/17 and an unqualified audit in 2017/18, before the qualified opinion in 2018/19 which was a result of the lack of audited financial statements. The companies the UIF worked with often had financial years ending in different months. This was the main reason for the qualification.

Ms B Van Minnen (DA) asked how long the current board members had been in their current positions. What had the turnover been in the last few years?

Mr Maruping replied that most of the board members had been in their positions for over three years.

Ms Van Minnen said the lack of records and internal controls at the UIF came up repeatedly. What was being done about it?

Mr Maruping said the UIF was aware of these deficiencies. Some of them resulted from the geographical spread of its operations. This sometimes caused delays which the Auditor-General interpreted as unavailability of documents. A Chief Operations Officer was appointed to run the audit process from end to end.

Ms Van Minnen asked if Mr Maruping anticipated that the problems would be solved by the next audit.

Mr Maruping said he expected an improvement.

Ms Van Minnen asked what progress was made on the recommendation to implement project management controls.

Mr Maruping replied that the appointment of the Chief Operations Officer was part of this. The Chief Operations Officer submitted monthly reports to the Commissioner, the Auditor-General and the audit committee. A probity team had also been appointed in the Commissioner’s office.

Ms Van Minnen asked why so many contracts exceeded their costs by over 15% without the prior approval of National Treasury.

Ms Fezeka Puzi, CFO, UIF, explained the main problem was contract management. An “SCM champion” was identified in each department.

Ms Van Minnen drew attention to two cases involving Accenture, where there was a conflict of interest and no tax clearance certificate. What happened? How would it be prevented in the future?

Mr Maruping explained the tender in question was advertised by the Department rather than the UIF itself. Accenture was appointed by the Department to develop a business case. The UIF then advertised a tender based on the business case. Accenture applied and scored highest. The UIF sought a legal opinion which cleared it to award the contract to UIF. However this was still picked up as irregular expenditure based on a conflict of interest.

Ms Van Minnen asked for an explanation of the lack of a tax certificate. She wondered how such a significant matter could fall through the cracks.

Mr Maruping said there was an investigation into the matter and all officials involved were put through a disciplinary process. Disciplinary action was recommended but corporate services had advised against taking disciplinary action regarding the conflict of interest.

The Chairperson said the matter was with the tax certificate, not the conflict of interest.

Mr Maruping clarified the UIF was advised not to take disciplinary action because the tax certificate could not be found at the time but it was found later. This went back to the matter of record-keeping.

Ms Basani Duiker, Chief Director: SCM governance, monitoring and compliance, National Treasury, said Treasury had a different view of the matter. The conflict of interest arose because Accenture was part of the development of the bid specifications of the tender. When the condonation request was reviewed, Treasury noticed the evaluation criteria were not specified in the terms of reference. The tax clearance that was provided was for a different service provider, not Accenture. Because there was no evidence of consequence management, the R96m was not condoned.

The Chairperson asked which tax certificate was found. Was it Accenture’s?

Mr Maruping said Ms Duiker was referring to the matter of the business case. The business case was developed for the Department, but the tender was put out by the UIF.

The Chairperson was surprised at how much Mr Maruping separated the UIF from the Department. The business case developed for the Department included the UIF, did it not? That was the bottom line.

Mr Maruping apologised for not explaining the situation well. The legal opinion had not given the UIF any basis for excluding Accenture from the tender.

The Chairperson asked if Treasury was consulted.

Mr Maruping did not recall consulting Treasury.

Ms Van Minnen was not satisfied that the missing tax certificate explanation. Treasury said that it was a completely different tax certificate was found. She asked for more clarity.

Ms Puzi said the tax certificate was found after the Auditor-General flagged it. The problem was poor record management.

Ms Van Minnen asked if the Nexus Forensics investigation, going back to 2014, was related to the recommended disciplinary action that was not carried out.

Mr Maruping said the recommendation for disciplinary action covered the bid adjudication committee, the bid evaluation committee and the bid specificatio committee, and the officers who misplaced the tax certificate. The bid adjudication committee was told it should have picked up the conflict of interest, but its role was to score bids, not evaluate administrative matters.

The Chairperson asked if it was right that the bid adjudication should just score bids and ignore everything else. He thought this was a myopic outlook.

Mr Maruping replied that it seemed right for the committee to focus on its role of evaluating bids.

The Chairperson said that to evaluate a bid, surely the committee needed to be exposed to the environment of the bid?

Ms Puzi explained that there was another committee who considered bids before the bid evaluation committee that could have picked up the conflict of interest.

The Chairperson asked if this implied that whoever advised the disciplinary action was in error.

Mr Hadebe asked how much the business case contributed to the draft tender specifications, including the scope of work. Was any bid scoring related to these matters? Were companies who were part of compiling the tender specifications prohibited from participating in that tender? Was there any advantage to a company who had submitted a business case?

Mr Maruping replied that the business case was used as the basis of the tender document.

The Chairperson asked where the legal advice permitting Accenture to bid had come from.

Mr Maruping said it was the state law advisor.

Mr Lamati acknowledged that problems sometimes arose through treating the UIF as a separate entity. Though there was no legal basis for excluding Accenture, perhaps there was some naivety. Legal advice was just advice. With the benefit of hindsight, it was clear that a different path should have been taken.

Ms Van Minnen welcomed the stability of the board, but wanted to know what assurance could be given that internal controls would be in place.

Mr Maruping acknowledged that record-keeping was an ongoing problem. This was why a Chief Operations Officer was appointed. Records and financial statements would be prepared for the Auditor-General in advance where possible. The UIF would also pay for the annual financial statements of investee companies who were unable to make them available for whatever reason.

A representative from the office of the Auditor-General said that this was not exactly what was required. The important thing was for the UIF to have a verification process to enable it to be confident in the figures it presented. It was important for the UIF to have an accurate picture of the value of its investments.

The Chairperson noted the UIF was paying to receive information from investees. He asked a representative from the Public Investment Corporation (PIC) to clarify.

Mr Roy Rajdhar, Executive Head: Impact Investing, PIC, explained there was no legal obligation for investee companies to provide their statements in the timeframe the UIF required. Where a company had a financial year that ended at a different time, the UIF was picking up the cost of preparing statements for the remaining months. There were also costs arising from the need to align the investee companies’ statements with the accounting standards used by the UIF.

Mr Prittish Dala, acting chairperson: audit committee, UIF, said that the audit committee was driving toward a clean audit at the UIF. A root cause analysis was done to find the origin of the record-keeping problems. If it was a requirement for investment from the UIF that companies align their financial years, that would also solve the problem.

The Chairperson noted there was great regression of audit outcomes over the last three years. This context should be borne in mind. He said that the Committee had not finished with the CF and stressed again that it did not seem to appreciate the gravity of the ongoing disclaimers.

Mr Somyo said it would be futile to meet with the CF again later that day.

Mr Hadebe agreed. The CF would need to come back on another day.

Mr Lees suggested the Committee be allowed to submit questions and request information ahead of any follow-up meeting.

Ms Dunjwa asked to be notified of the follow-up meeting.

The Chairperson instructed the CF to clean up its irregular expenditure register and investigate the correspondence that led to the confusion of documents. He invited Committee Members to submit questions by the next day at 12pm. He asked the UIF to provide the legal opinion allowing Accenture to submit a bid, and he asked National Treasury to provide further clarity on the disputed tax certificate. The explanation given was not adequate. He urged the CF to have a different attitude when it returned to the Committee.

Minister Nxesi acknowledged the deep issues at the CF. Investigations often relied on other entities who took their own time, but this was not an excuse. The appropriate ICT systems would be put in place to improve internal controls and mitigate corruption. The document would be fine tuned and deadlines would be adhered to.

The Chairperson said the Committee would meet with the Department of Correctional Services the next day at 9am and South African Airways at 6pm. He added that the documents the Committee requested from SAA were not received. The meeting would go ahead and a decision would be taken regardless.

The meeting was adjourned