National Government Unauthorised Expenditure 1998 – 2004: Treasury briefing

Meeting report

PUBLIC ACCOUNTS STANDING COMMITTEE
10 August 2005
NATIONAL GOVERNMENT UNAUTHORISED EXPENDITURE 1998 – 2004: TREASURY BRIEFING

Chairperson: Mr F Beukman (NNP)

Documents handed out:
National Government Unauthorised Expenditure 1998/1999 – 2003/2004
Economic Services and Infrastructure

SUMMARY
The National Treasury briefed the Committee on unauthorised expenditure for the financial years stretching from 1998/1999 to 2003/2004. After a quick overview of how unauthorised expenditure was dealt with, the National Treasury delegation presented its recommendations on the various instances of unauthorised expenditure that the Committee had yet to approve. In total, this amounted to R503 million.

Of this amount, R272 million could be attributed to the Central Government Administration cluster, R5.9 million to the Financial and Administration Service Cluster, R140 000 to the Social Services Cluster, R191 million to Justice and Protection Services, and R34 million to Economic and Infrastructure Development. National Treasury recommended the unconditional approval of unauthorised expenditure in all cases under the Central Government Administration Cluster, the Financial and Administrative Service Cluster, the Social Services Cluster.

In the Justice and Protection Services Cluster, conditions were attached to the recommendations for approval of unauthorised expenditure of R118 million. The remainder of the R191 million for the Cluster was unconditionally recommended for direct charge against the current or a future budget of the Departments of Defence, and Justice and Constitutional Development, respectively.

In the Economic and Infrastructure Development Cluster, unauthorised expenditure amounting to just over R1 million was not recommended for approval. Furthermore, conditions were attached to the approval of unauthorised expenditure of R136 000 and R9 million in the Departments of Agriculture and Communications respectively.

Members were particularly concerned over reports of theft and losses in the Department of Public Works which had resulted in unauthorised expenditure of R111 million. Ms A Dreyer (DA), in particular, requested further information in this regard. Otherwise, the recommendations of National Treasury were heard with minor queries only. The Chairperson commended the National Treasury on the standard of its presentation.

MINUTES

Treasury briefing

Underlying Principles
Mr N du Plessis (National Treasury Chief Director: Public Finances Management Act Implementation Unit) defined unauthorised expenditure as the overspending of-, or expenditure made in non-accordance with the purpose of a vote, or a main division within a vote. Upon the discovery of unauthorised expenditure, the accounting officer must immediately report it in the monthly report to National Treasury. It must also be reported in the annual report as a note to the financial statements. National Treasury then submitted a report to Parliament — and the Committee — on cases of unauthorised expenditure as it was reported in the departmental annual reports. It also advised whether each case should be approved or not; and, whether additional funds should be provided, or whether it should be charged against funds allocated for future financial years.

Should the unauthorised expenditure not be approved, the funds should either be recovered from the responsible official, or be written off and disclosed as such in the annual financial statements. Non-approval should result in cases where funds were spent on ends that did not relate to departmental objectives, or where there was evidence of a lack of internal discipline, wastefulness and fraudulent and corrupt activities.

Discussion
Mr E Trent (DA) asked whether there were procedures in place to deal with situations where officials had to access funding for legitimate ends and fell procedurally foul due to technical error or abuse.

Mr Du Plessis responded that such instances would count as unauthorised expenditure and would be dealt with accordingly.

Ms L Mabe (ANC) asked if there were any repercussions for officials found responsible for unauthorised expenditure, but who had since been promoted to more senior positions in other departments.

Mr Du Plessis noted that a response that catered for every possibility in line with Ms Mabe’s question would be very difficult, but that the Public Finance Management Act (PFMA) was very clear that corrective and disciplinary steps needed to match the seriousness of the financial management offence.

Overview: National Departments Unauthorised Expenditure 1998/1999 – 2003/2004
Mr N Cole (National Treasury Chief Director: Expenditure Planning) told the Committee that unauthorised expenditure for the period concerned totalled almost R1.5 billion. Of this R452 million could be attributed to the Central Government Administration Cluster, R196 million to the Financial and Administrative Cluster, R14 million to the Social Services Cluster, R754 million to the Justice Services Cluster, and R78 million to the Economic Services Cluster.

Of these amounts, R982 million had already been dealt with and, as such, included in the Finance Act. Of the remainder, R132 million had been recommended by the Committee for direct charge already and R46 million not. An amount of R272 million had yet to be processed in this manner.

Central Government Administration Cluster
The total outstanding amount for the Cluster was contributed to largely by the Department of Public Works in the amount of R257 million. The reasons provided by the Department included over-expenditure necessitated by the provision of needs for land and accommodation to the tune of R144 million, while the replacement value of theft and losses from construction sights totalled almost R112 million. The Department also indicated that it had R28.7 million in savings that could offset some of the unauthorised expenditure.

In the case of the Department of Home Affairs, R4.2 million of the outstanding R4.6 million was made up by costs incurred for the transportation of deportees. The Department of Provincial and Local Government had no outstanding unauthorised expenditure. Furthermore, there was no instance where National Treasury had not advised the approval of outstanding unauthorised expenditure for the other departments of this cluster.

Discussion
Ms A Dreyer (DA) noted her concern over the amount attributed to theft and losses in the Department of Public Works and asked if anything was being done to try and curb these losses.

Mr Trent concurred and enquired why anything had not been done sooner and whether the Department had not perhaps been guilty of negligence or in contravention of any regulations because of it.

Ms M Mbina (National Treasury Chief Director: Financial and Administrative Services) replied that from 2005 onwards, the Department would hold the relevant contractor responsible for the purchasing and protection of all materials needed on-site. Thus, should there be losses it would be borne by the contractor, and not the Department. The previous situation had evolved from a notion that economies of scale would be better if all materials were purchased by the Department, for which it was then also responsible while the materials were stored on-site.

Ms Dreyer accepted this but later expressed her extreme dissatisfaction with the fact that the Department had left arrangements to continue for so long. She requested information concerning the length of time that the previous system of materials procurement and security were in place. She also wanted to know who was responsible for it; what the extent of the theft and losses were over that period; and, whether anyone derived any illegitimate benefit from it.

Mr Kganyago (National Treasury Director-General) echoed Ms Dreyer’s dissatisfaction, and explained that aside from the theft and losses resulting from the previous policy, it also offered little deterrence to wasteful working practices on-site. As such, all the losses suffered from theft and wastage would have neutralised any benefit that might have been had from concentrating the buying power in the hands of the Department.

Mr Trent lamented the negative effect that this had on growth and job creation in the construction industry, on government funds willed for infrastructure provision, and on the broader public who had to go without infrastructure and housing as a result. He stated that a solution to this problem would have to be made a priority by Government.

Mr G Koornhof (ANC) asked why National Treasury recommended that the outstanding unauthorised expenditure of the Department of Public Works be charged directly against the National Revenue Fund.

Of the complete amount of R257 million, R144 million was due to overspending on programme two that pertained to leases for Government premises. Ms Mbina explained that while it might not have been budgeted for properly, approval of this unauthorised expenditure was recommended as it was in the interest of the state.

Ms T Tobias (ANC) raised concern over the confusion often reported by other departments over the Department of Public Works’ role as their accommodation provider, as accounts and leases were often not dealt with timeously.

Mr Kganyago acknowledged that this was a problem, but stated that the devolution of these responsibilities to the departments themselves was currently being looked at. Where this had already been done, the Department of Public Works only ensured that the norms and standards for Government accommodation were upheld. An example of this was the policy that Government premises should as far as possible remain in city centres rather than moving out to city suburbs.

In relation to his earlier question, Mr Trent also asked whether it had been established whether any irregular benefit had gone to the Department of Home Affairs officials involved in arranging the transportation of the deportees.

Mr Du Plessis replied that in this specific case, the unauthorised expenditure occurred in 2000/2001 — when the PFMA was yet to be fully implemented. Technically, it would not have been unauthorised expenditure under the previous public finance management dispensation.

As neither Mr Du Plessis nor Ms Mbina were able to provide further information on whether any disciplinary steps had been taken against the relevant official, Mr F Beukman (NNP), in his capacity as Committee Chairperson, requested that it be provided in writing at a later stage.

Mr F Nomvalo (Deputy Director-General: Office of the Accountant-General) pointed out that in certain instances, unauthorised expenditure were inevitable and not necessarily a cause for disciplinary action.

Mr Trent concurred with Mr Nomvalo, but stated that it was important to ensure that the necessary checks and balances were in place to provide that disciplinary action was indeed taken where there was cause for it.

Financial and Administrative Service Cluster
There were two instances of unauthorised expenditure in this cluster, both of which were recommended by National Treasury for approval as direct charges against the National Revenue Fund. The first was over-expenditure in the recurrent budget of the Government Communication and Information System (GCIS) in the amount of R1.59 million, which it was wrongly under the impression it could offset by savings on its capital budget as it was contrary to the requirements of the PFMA. National Treasury recommended this for approval as the GCIS had remained within its total budget.

The second was unauthorised expenditure by the South African Management Development Institute (SAMDI) in the amount of R4.37 million. The expenditure was made in-line with the objectives of SAMDI and value for money was obtained. The reason for the expenditure was that donor funds previously available to SAMDI had become unavailable. Thus, National Treasury recommended that it be approved for direct charge to the National Revenue Fund.

Discussion
Mr Trent asked for further clarification of the unauthorised expenditure by SAMDI.

Ms Mbina explained that the donor funding had been withdrawn, as the donors felt that there was no compliance with their requirements. She also mentioned that the Minister had instituted an investigation against the former Director-General because of this and he then vacated his position as a result of its outcome. The exact circumstances around the former D-G’s departure were, however, not clear.

Ms J Fubbs (ANC) expressed her reservations over the use of "value for money" as a justification for the approval of an unauthorised expenditure as it was done in the case of the SAMDI example. She emphasised that there was great danger in establishing this as a principle as value for money did not equate to quality spending. She also asked whether National Treasury and the office of the Auditor-General had an aligned understanding of what did and did not constitute unauthorised expenditure.

Mr Kganyago replied that value for money was important, but it was never used as a justification for the approval of an unauthorised expenditure in itself. Whether value for money was in evidence or not, unauthorised expenditure would never be recommended for approval if there was evidence of a lack of internal discipline, wastefulness and fraudulent and corrupt activities in a department. Finally, Mr Kganyago stated that there was a common understanding of unauthorised expenditure between National Treasury and the office of the Auditor-General.

Social Services Cluster
In the Social Services Cluster there was one outstanding case of unauthorised expenditure only, that being for the Department of Social Development to the tune of R140 000. It occurred while the Exchequer Act was still in place, but would have been seen as irregular expenditure, rather than unauthorised spending under the PFMA. This was so as the expenditure took place in violation of State Tender Board regulations. The explanation forwarded by the Department stated that it did not have the necessary systems in place to take the necessary disciplinary steps against the officials involved. The Department had stated that it had since created additional capacity within its finance section and its procurement unit. Further steps to avoid future occurrences of this problem included the introduction of clear and transparent procurement policy and guidelines. National Treasury conditionally recommended the approval of the unauthorised expenditure as a direct charge against the National Revenue Fund as the Department had shown that a service was rendered that was of benefit to the state and that no officials had benefited from the transactions.

Justice and Protection Services Cluster
All three departments still had outstanding cases of unauthorised expenditure: Correctional Services in the amount of R290 000, Defence in the amount of R51.96 million and Justice and Constitutional Development in the amount of R139 million. In the case of Correctional Services the instances of unauthorised expenditure preceded the PFMA and related to the flouting of State Tender Board regulations. The Parliamentary Law Advisors had indicated that the feasibility of the accounting officer recovering any possible loss to the state should be investigated before the Committee could consider any validation of the unauthorised expenditure.

In the case of the Department of Defence, an amount of R3.9 million once again related to non-compliance with State Tender Board regulations. Then there was another amount of R5.4 million that was broken up into three smaller totals that spanned over the three financial years stretching from 1998/1999 to 2000/2001. This was included in the 113^th report of 2003, but final recommendation for approval was still pending as it depended on the outcome of a court case.

The third amount for the Department of Defence, R25.9 million, originated in 2003/2004. It entailed overspending within the vote and related to the undertaking of peacekeeping support operations. In the case of this third amount, National Treasury recommended that it be approved for charge against the allocation to the Department in either the current or a future financial year. Another amount of R14.3 million came into being for the same reason and National Treasury recommended that it also be approved, but this time for direct charge against the National Revenue Fund.

The remainder of the outstanding amount of unauthorised expenditure for the Department of Defence consisted of a number of smaller amounts that related to the funding of military museums. This occurred at a time when there was no authority in place to fund military museums. The legislation had since been reviewed and funding for military museums were now included. As such, Treasury recommended that the Committee approve the unauthorised spending for charge against the Department’s budget in either the current or future financial years.

In the case of the Department of Justice and Constitutional Development there was, firstly, an amount of R5.2 million from 1999/2000 that resulted from overspending on the personnel budget. National Treasury recommended that this amount be approved for direct charge against the National Revenue Fund as it was not a loss to the state. Remedial action taken by the Department included modifications to the budgeting process and to the allocations made to human resources in the Department in following years.

The next amount (R844 000) also resulted because of deviation from State Tender Board regulations. The background here was that the Witness Protection Unit entered into a lease without going through the prescribed tendering process due to security implications. National Treasury therefore recommended that this unauthorised expenditure be approved for charge against the current financial year’s allocation.

Then in 2001/2002 there was an amount of R23.9 million that resulted because of overspending on personnel. National Treasury recommended that this be approved for charge against the2004/2005 budget. Mr Cole stated that the matter must be treated as unauthorised expenditure since the personnel budget was overspent, but the net effect of the main vote was that of under-expenditure. As stated earlier, inadequate personnel funding had since been addressed.

The final instance of outstanding unauthorised expenditure for the Department of Justice and Constitutional Development was to the tune of R109 million and stemmed from over-expenditure in two different programmes. Here National Treasury recommended that detailed explanations be requested for the over-expenditure in Programme 1 ("Administration") as well as for high expenditure in March 2003. The amount in question was R63 million. National Treasury deemed the financial management of the programme as suspect as most of the standard items had been overspent.

Over-expenditure in the amount of R46 million on Programme 2 ("Court Services") again related to over-expenditure on personnel. Additional funding had been allocated in the 2003/2004 Medium-Term Economic Framework to address the shortfall. In both these cases, National Treasury advised that approval/non-approval of these amounts be delayed until further clarification was received from the Department.

Discussion
Mr Trent asked whether anything had been done with regards to the recommendation of the Parliamentary Law Advisors regarding the unauthorised expenditure of the Department of Correctional Services.

Mr Beukman stated that the information would be obtained by the time that the recommendations had to be made by the Committee.

Dr Koornhof expressed concern over the adequate provision of funds for peacekeeping operations. He emphasised that a way had to be found so that the Department of Defence was not penalised for expenditure legitimately made in this regard. He also stated that measures should be in place to ensure that international refunds for peacekeeping operations were pursued where it was available.

Finally, Dr Koornhof pointed out that in the cases of the two amounts that related to peacekeeping efforts (R25.9 million and R14.3 million), National Treasury recommended that the Department of Defence should have the benefit of R14.3 million returned to the National Revenue Fund. He ventured that this might be due to a typing error and suggested that the Department of Defence should have the benefit of R25.9 million returned to the National Revenue Fund in the case of the first amount.

Mr Trent noted that National Treasury recommended the approval of both the amounts of unauthorised expenditure made in relation to peacekeeping operations. He questioned why the amount of R25.9 million was recommended to be approved for charge against the allocation to the Department in either the current or a future financial year, and recommended that the amount of R14.3 million be approved, but this time for direct charge against the National Revenue Fund.

Mr V Mbethe (National Treasury Chief Director: Justice and Protection Services) pointed out that unauthorised expenditure due to the undertaking of unforeseen peacekeeping missions were much less likely in the future as such missions were much more regular and well provided for now.

Mr Kganyago indicated that while every effort was made to claim international refunds for peacekeeping operations where they were promised, it was a fact that they did not always realise and that, accordingly, unauthorised expenditure could result.

Mr Cole advised that National Treasury would have to return with a proper clarification of why the recommendations for the approval of the two amounts of outstanding expenditure related to peacekeeping were treated differently as it did not have the necessary information at hand.

Regarding the unauthorised expenditure of R109 million relating to Programme 1 and 2 in the Department of Justice and Constitutional Development, Mr Koornhof suggested that the Committee go ahead with a recommendation as enough time had passed for the Department to come forth with the relevant information.

Economic Services Cluster
Four Departments had registered instances of unauthorised expenditure: Agriculture, Communication, Land Affairs and Trade and Industry. In the case of Agriculture the total amount of R663 000 consisted of two smaller amounts. Of these R527 000 was recommended by National Treasury to be approved for direct charge against the National Revenue Fund. The explanation for this went as follows: A consultant was employed to assist in the compilation of a national irrigation policy. In order to complete the project, additional workshops and seminars had to be arranged. These additional consultation sessions were paid from the Provincial Departments’ own budgets and were to be claimed from the National Department. A Senior Manager recognised that not all Provincial Departments followed the correct procurement prescripts in making further use of the services of the aforementioned consultant. The National Department took the responsibility of reporting the matter to the State Tender Board and requested retrospective approval. Retrospective approval was, however, not possible as the payments were not regarded as an extension of the contract with the consultant. The Department had subsequently put corrective measures in place to ensure that correct procurement prescripts were followed.

The remaining R136 000 resulted when a Senior Manager exceeded his delegated authority on an English Language course. Here National Treasury recommended that the Committee first obtained further information with regards to the follow-up of this instance before it considered approval / non-approval.

In the case of the Department of Communications the outstanding amount of R9000 came as a result of non-compliance with procedures. In this case it related to the unlawful promotion of an official, without advertising the position. National Treasury recommended that Parliament await the outcome of an investigation by the Department of Public Service and Administration before it considered approval / non-approval of the unauthorised amount.

In the Department of Land Affairs there was an outstanding amount of R7000 that was paid to the Lephotsoana II Trust for Open Day celebrations attended by the President. National Treasury recommended that it be accepted as authorised, but that it was recorded as expenditure against this year’s budget or future financial years.

In the case of the Department of Trade and Industry, the total of cases of unauthorised expenditure came to R32 million. Of this R25 000 concerned the appointment of a consultant who rendered services to the Department prior to his contract period. As advised by the State Tender Board, National Treasury did not recommend the approval of this expenditure pending further clarification. The same applied to amounts of R376 000 (mobile phone contracts), R62 000 (removal services) and R27 000 (Award Ceremony).

In terms of over-expenditure there was an amount of R647 000 from 1999/2000 that the National Treasury recommended the Committee not approve. The amount originated when the Department participated in National Pavilions under the auspices of the Export Marketing Programme. The Department utilised companies to assist with freight services. Expenditure exceeded the tender amount due to exchange rate fluctuations and the costs of returning unsold goods.

Then there was an over-expenditure in the amounts of R6.3 million, R11.5 million, R14.2 million and R229 000. All of these resulted because of overspending on a main division of the vote. All of these also came about through claims that the Department was directed to honour by the High Court. National Treasury therefore recommended that all of these amounts be approved for direct charge against the National Revenue Fund.

Discussion
Mr Beukman asked whether there had been regular attempts by National Treasury to follow up on information from departments such as in the case of the R136 000 at the Department of Agriculture.

Mr L Magagula (National Treasury Chief Director: Economic Services and Infrastructure) conceded that follow-ups did not happen often enough, but was partly stifled by the lack of reaction from accounting officers to written reminders about outstanding issues.

The meeting was adjourned.