PRASA & RSR 2018/19 Annual Reports; Transport portfolio audits

Meeting report

Department of Transport (DoT) 2018/19 audits: Auditor-General South Africa (AGSA) briefing
Mr Solly Segoa, Corporate Executive: AGSA, introduced this team and handed over to the Senior Manager.

Ms Mary-Ann Whitford, Senior Manager: AGSA, said that role of the AGSA in the reporting process is to reflect on the audit work performed to assist the Portfolio Committee in its oversight role of assessing the performance of the department and its entities – taking into consideration the objective of the Committee is to produce a Budgetary Review and Recommendations Report (BRRR).

The annual audit examines three areas:
• Fair presentation and absence of significant misstatements in financial statements.
• Reliable and credible performance information for predetermined objectives.
• Compliance with all laws and regulations governing financial matters.

The percentages in the presentation were based on the DoT and 13 entities in the Transport portfolio:

Road portfolio:
• South African National Road Agency (SANRAL)
• Road Accident Fund (RAF)
• Cross Border Road Transport Agency (CBRTA)
• Road Traffic Management Corporation (RTMC)
• Road Traffic Infringement Agency (RTIA)
• Driving License Card Account (DLCA)

Rail portfolio:
• Passenger Rail Agency of South Africa (PRASA)
• Rail Safety Regulator (RSR)

Aviation portfolio:
• Air Traffic and Navigation Services (ATNS)
• Airports Company of South Africa (ACSA)
• South African Civil Aviation Authority (SACAA)

Maritime:
• South African Maritime Safety Authority (SAMSA);
• Ports Regulator (PR)

For credible financial reporting, all auditees must submit their financial statement by the legislated date. Annual Financial Statements (AFS) must be submitted without errors. In 2018/19, 43% achieved unqualified audit opinions only because they corrected all misstatements identified during the audit. SAMSA and PRASA (14% of entities) were not able to achieve credible financial reporting.

SAMSA qualification areas include:
• Irregular Expenditure
• Commitments
• Receivables
• Payables
• Property, plant and equipment

PRASA disclaimer areas include:
• Property, plant and equipment
• Unspent Conditional Grants
• Accumulated Surplus
• Capital Subsidy and Grants amortised, subsidy received in advance, operational subsidy
• Fare revenue (comparative), Commitments
• Risk management, irregular and fruitless and wasteful expenditure
• Cash flow statement, statement of comparison of budget and actual amounts

The audit outcomes of the portfolio have regressed over the five year period from 29% having an unqualified audit opinion with no findings (clean audit) in 2014/15 to 21% in 2018/19. Some have inconsistent outcomes:
- PRASA regressed from a qualified audit opinion to a disclaimer due to significant material misstatements in the financial statements and limitation of scope imposed.
- SAMSA remained the same as it could not address significant findings from the prior year.
- ATNS improved from a qualified opinion to unqualified audit opinion with findings.

CBRTA was commended for retaining its unqualified audit opinion with no findings for the past four years. RTMC and RTIA also improved their audit outcomes from unqualified with findings to unqualified with no findings.

Financial statement preparation remains a concern in the portfolio as material adjustments were effected to the AFS submitted for audit by ACSA, ATNS, DLCA, DOT, RSR, SANRAL and PRASA.

Key non-compliance areas include:
• Procurement and contract management (DOT, RSR, SACAA, DLCA, SAMSA, Ports Regulator, ACSA, SANRAL and PRASA)
• Material misstatements in submitted financial statements (DOT, RSR, ATNS, DLCA, SAMSA, ACSA, SANRAL and PRASA)
• Prevention of unauthorised, irregular and fruitless and wasteful expenditure (DOT, RSR, ATNS, SAMSA, ACSA, SANRAL and PRASA)

Irregular Expenditure decreased by R1.1 billion from the prior year. PRASA, SANRAL and ACSA were the main contributors to irregular expenditure:
• PRASA (R3 037m) – Competitive bidding not followed (R1 740m), procurement not in accordance with PPPFA and SCM policy (R773m), contract price exceeded (R167m), payment without contract (R118m) and other non-compliance with SCM prescripts (R239m).
• SANRAL (R419m) – Procurement without competitive bidding (R309.2million), non-compliance with procurement requirements (R103.5m) and non-compliance with legislation on contracts (R6,5m).
• Consequence management (ATNS, SAMSA, ACSA, SANRAL and PRASA)
• Revenue management (SAMSA)
• PRASA increased fruitless and wasteful expenditure from R86.6m in 2017/18 to R136.1m in 2018/19.

Root causes for the regression in audit outcomes were due to instability and vacancies in key position:.
- Instability at executive management level at PRASA included these positions filled in an acting capacity for 2018/19: Group Chief Executive Officer, Group Chief Financial Officer, Chief Information Officer, Information Security Officer. The position of GCFO was filled from September 2019. This impacted PRASA negatively with significant deficiencies in financial management, performance reporting and compliance monitoring.
- Instability at executive management level at ACSA and RAF included Chief Executive Officer and Chief that are vacant and have been filled in an acting capacity. The RAF Board was appointed on an interim basis and the appointment was not done in accordance with the RAF Act. This has created the instability in leadership to provide effective oversight.
- At SAMSA the CEO position is vacant since May 2017 and the CFO was appointed during the year.

AGSA recommendations to the DOT and its entities were:
• Permanent boards in entities with a mix of appropriate skills and competencies should be appointed,
• Executive management positions should be filled with appropriately skilled and experienced personnel,
• Develop and implement action plans to address audit findings;
• Implementation of a culture of consequence management.

AGSA recommendations to the Portfolio Committee for oversight:
• Monitoring and regular follow up with the executive authority and the accounting officer/authority
• Appointment of permanent boards and audit committees to ensure they are fully constituted with members with appropriate skills and experience for effective governance and oversight over the entities;
• Management of vacancies to ensure stability of leadership;
• Progress on audit action plans by the entities to address undesirable audit outcomes.
• The culture of consequence management should be enforced in the portfolio.

Discussion
Mr C Hunsinger (DA) referred to the expanded mandate of the Auditor General. Over a number of years the audit process has become compliance driven as opposed to service delivery driven. Therefore, is it not a necessity rather to expand the Auditor General mandate to be service delivery driven. He asked how much less of every rand ends up for the benefit of the public at the end of the day.

Mr Hunsinger asked why 80% of the irregular, wasteful and fruitless expenditure of the previous years had not been dealt with. There has been a build-up over the years. What AGSA is doing about this? What are the steps to address this challenge?

Mr Hunsinger asked about leadership stability in management and the accounting authority. Currently 12 or so entities have 54 vacancies in key positions. What can be the effectiveness and efficiency of the leadership in light of these 54 vacancies? He asked for AGSA to comment on the continuation of acting appointments and interim boards.

Mr T Mabhena (DA) asked how often does AGSA get feedback from investigations in terms of its expanded mandate because it now can report material irregularities to the state institutions, like the Hawks, for further investigation.

Mr Mabhena asked if the issuing of a certificate of debt by AGSA has consequences for an entity.

Mr K Sithole (IFP) asked if AGSA gets feedback from the department about consequence management.

Mr Sithole asked why AGSA referred its recommendation on permanent board appointments to the Portfolio Committee instead of directing it to the executive authority of the department.

Mr J Bilankulu (ANC) asked if is there an impact from the money spent by these entities. As public representatives they want to follow the money and see its impact on ordinary citizens. For example, the CBRCA matter which he agrees with, the awarding of the illegal contract for buses in the Western Cape, and the serious material loss particularly at PRASA, and the life cycle management (LCM) regression of 69%. What is AGSA doing about this?

Mr L McDonald (ANC) asked why no assessment was done on the internal controls of the Ports Regulator and the Air Traffic Navigation Services. He asked who the two officials are that lacked competencies and what positions they occupy as slide 28 explains the root causes are key officials who lack competencies.

Ms M Ramadwa (ANC) said that when explaining irregular, wasteful and fruitless expenditure AGSA should indicate which particular entity, not club them together as the Committee will interact with these entities.

Mr B Yabo (ANC) was worried about the length of time it took for investigations to be concluded. What is the material impact of investigations taking too long in the context of law and consequence management? What can be done to make AGSA accountable for investigations taking too long?

Mr P Mey (FF Plus) asked what the delay is for the appointment of the permanent internal audit unit and audit committees.

Ms N Nolutshungu (EFF) said the Annual Performance Plan (APPs) usually include issues of transformation and empowerment. The audit says nothing about this and about job creation. AGSA must quantify the impact of wasteful expenditure on service delivery. Her major concern is supply chain management in all the entities, which is something the Committee needs to look at going forward.

Mr M Chabangu (EFF) asked if the AG has the teeth to bite. Does it have powers or is it just delegating officials to table the report to the Committee because this is the continuation of corruption for many years.

Responses
Mr Segoa replied about AGSA looking at service delivery as part of its expanded mandate, saying that it is a very important point to note and their intention is to deal with service delivery aspects as well. The expansion of the mandate came into effect only on 1 April 2019, which meant that most of the work on turnaround in entities as a result of the expanded mandate will obviously kick in with the outcomes they have shared on PRASA, but one will see a lot more as they report back to this Committee going forward. AGSA has started putting in resources like engineers and performance auditors so that it can look deeper with this mandate to ensure that if there is financial loss and non-compliance that impacts service delivery and harms the public, it is able to show in numbers the impact of that.

Mr Segoa said AGSA is concerned about the 80% of irregular, wasteful and fruitless expenditure that has not been dealt with. In the past its main responsibility was to identify irregular, wasteful and fruitless expenditure as well as unauthorised expenditure. Sections 38 and 51 of the Public Finance Management Act specifically require accounting officer (DG) and accounting authority (board) to deal with irregular expenditure and to ensure consequence management. That has not really been successful in the past. With the current mandate AGSA is now responsible – unlike in the past – to ensure the AO/AA (accounting officer/authority) is accountable for this.

The key issue in the past was there were no consequences for wrongdoing. Hence the same action could be repeated over and over again as there was no harm for those transgressing the law. Now from 1 April 2019, AGSA has the responsibility to take on those accounting officers/authorities who are not doing their bit to account for irregular, unauthorised, wasteful and fruitless expenditure.

Mr Segoa said another key issue is that it is not a sustainable solution to appoint acting managers and interim boards. The 'interim and acting arrangement' is a key deterrence to consequence management and it happens a lot in entities such as PRASA and ACSA. For example, there will be non-compliance and the interim board will attempt consequence management but then in a short while that interim board goes. The new board comes in and it starts all over again. It does not necessarily pick up were the interim board left off, it starts with new priorities.

Mr Segoa said service delivery must be dealt with through the Annual Performance Plans. AGSA sees lots of targets in the APPs which do not deal with service delivery. One of the recommendations AGSA is making is that when the APP is tabled in Parliament, the Committee should hammer on the significance of what is reported on in the APP. The Committee responsibility is checking out if what the department and entities have promised in the APP can be supported with audit evidence.

Mr Segoa said that the certificate of debt is meant to be the last resort in deterring those entities that do not take on their responsibility. Previously, AGSA only reported and hoped that action would be taken. Now the expansion of mandate means the AG will come with a remedial action which is binding. It is only the courts that can turn the decision of the AG around.

Therefore, if the AO/AA does not execute the remedial action, then the AG has the responsibility to quantify the impact of the lack of action, whether in monies to be recovered or locomotives not procured correctly. If the AO/AA does not deal with this, this expenditure will now have to be recovered from the AO/AA. In a nutshell that is the impact of the certificate of debt. It is not an instrument that will be used to refund entities.

Mr Polani Sokombela, Business Executive: AGSA, said that AGSA is an evolving institution, and it would like to empower the Committee so that it will be able to exercise its role.

Mr Sokombela said that the material irregularity at PRASA is that it is using a bus company in the Western Cape to transport train drivers when they are working late. The challenge is that it is a never ending contract, entered into in 2005 with no competitive bidding process. AGSA believes that material financial loss has been incurred. The PRASA board has promised there is an investigation and they will institute consequence management if they identify those who have transgressed the law.

Mr Sokombela said transformation is captured in the APP which is the service delivery document. Then AGSA has to audit all that has been done and report if there was service delivery in terms of the set targets.

Mr Sokombela explained that the recommendation to the Committee about the appointment of permanent boards is for the Committee to follow up with the Minister on the Minster’s responsibility to appoint permanent boards. AGSA is recommending that the Committee, in performing its oversight responsibility, should remind the Minister of the importance of appointing a permanent board.

Mr Sokombela said there has been a lot of instability in the Transport portfolio because of the delays in the appointment of boards and executive management. This is due to a lot of changes in Ministers of Transport and that had a negative impact on continuity because a new Minister would have to start from scratch. Hence they end up appointing interim boards, which exacerbated the instability.

Mr Sokombela said the Ports Regulator and Air Traffic Navigation Services internal controls were not assessed. ATNS is not audited by AGSA. In terms of the Public Audit Act, that audit is a section 43 audit, meaning that they have opted not to audit it; it is audited by a private firm. AGSA gives inputs about the audit outcomes. But they do not necessarily assess the internal controls. The Ports Regulator is really a small entity, it does not have a lot of activities. Therefore, AGSA classifies it as a small auditee and small auditees do not have their internal controls assessed.

The Chairperson said that due to time constraints, questions that were not answered should be responded to in writing. He thanked AGSA and said that the Committee will need a session with AGSA to deal with rands and cents that should have benefitted the general public and National Treasury must be part of this session.

Railway Safety Regulator (RSR) 2018/19 Annual Report
Mr Tshepo Kgare, RSR Acting Chief Executive Officer, gave performance highlights and an overview of financial report, human resources and risk management. The responsibilities include:
• Issue and manage safety permits in accordance with Safety Management System Determination.
• Monitor improvements in safety targets by assessing Safety Improvements Plans of operators.
• Conduct safety inspections and audits
• Monitor, investigate and report on railway occurrences.
• Develop regulations, safety standards and guidelines.

It enforces compliance by:
• Issuing notices of non-compliance and non-conformance.
• Imposing penalties for non-compliance with the Act or Safety Standards adopted by the RSR Board.
• Revocation or suspension of the safety permit.

Ms Kgare said the RSR has adopted a risk based regulatory approach towards railway safety management.
It aims to reduce operational risks; measure risk reduction using the risk data; move away from the use of lagging indicators in setting targets; and promote collaboration between RSR and the railway industry.

Ms Kgare said RSR received an unqualified audit opinion with findings on non-compliance on expenditure management. In 2016/17, RSR received unqualified audit with 11 findings and 1 recurring finding. In 2017/18, it received an unqualified audit with 16 findings and 4 recurring findings. In 2018/19, it received an unqualified audit opinion with 15 findings and 1 recurring finding. The findings include: non-compliance with supply chain management prescripts, performance information

In terms of targets performance, in 2016/17 it was 89%, 2017/18 it was 72%, and in 2018/19 it is 100%.

Ms Kgare spoke about the achievements in working towards its strategic goals of safer railways, sustainable institutional development and improved stakeholder service.

The HR Overview noted a total of 160 employees in five provinces, which include a head office in Gauteng. The vacancy rate is 19% for 2018/19. It was 34% in 2016/17, and 11% in 2017/18. Women empowerment is currently at 49%.

Ms Kgare said RSR high strategic risks include:
• Loss of key personnel
• Financial sustainability
• Lack of independence
• Inaccurate and incomplete safety information
• Loss of critical data
• Inadequate and incomplete safety information
• Rapid technological advancements
• Excessive cost of regulation

Only one risk was outside the risk tolerance level set by the board. The risk mitigations include:
• Performance incentives for good performers and increased focus on staff wellness initiatives.
• Implementation of the approved staffing plan to fill vacancies.
• A renewed focus on good governance and clean administration
Ms Kgare concluded that the risk outlook is improving.

Discussion
Mr Hunsinger asked for clarity on the penalties that RSR charges operators, mainly PRASA, which seems to be large part of its revenue stream, instead of prioritising the safety of passengers on railways which is the responsibility of RSR. It might look cheaper to apply penalties rather than fixing the problem of safety on trains. At the moment the awkward relationship between RSR and PRASA seems to focus on generating income instead of safety on trains.

Mr Hunsinger said he was very uncomfortable with the announcement that R3bn was moved from PRASA to somewhere else and asked for clarity.

He asked for details about the manual authorisations which are happening particularly on the Gauteng railway networks.

Mr Mabhena asked about corporate governance for the building lease contract that was cancelled. Does this mean that RSR is going to enter into a new lease contract and what are the financial implications of this? Explain the details of the lease contract.

Mr Mabhena asked why the loss of key RSR personnel is listed as an achievement and on page 29 it is listed as a high strategic risk.

Mr Mabhena noted that RSR is listed as one of the non-compliant entities in the AG’s report, which meant that there is no willingness to address the audit findings. He asked about consequence management for those responsible for non-compliance. He asked about RSR's recurring audit finding.

Mr Bilankulu said that the Act that established RSR to improve railway safety but if one looks at the regulator’s outcomes there is very little that talks of improving safety. RSR has dismally failed at its core function. This is something the Committee needs to look at with the Department.

Mr Bilankulu asked what the regulator has done about irregular expenditure, which started in the previous financial year and has increased in 2018/19.

Mr McDonald asked how much was spent on the court case with PRASA and on consulting services.

Ms N Nolutshungu (EFF) asked what measures have been put in place to avoid fruitless and wasteful expenditure, and what the outcomes are.

Ms Nolutshungu referred to RSR’s communication system and asked what measures have been put in place to prevent accidents on railway networks.

She asked for clarity about the problem RSR has about reporting to the same Minister as PRASA?

Mr M Chabangu (EFF) asked when RSR is going to bring back railway safety since ordinary citizens are not safe on the trains. It should be remembered that way back there were railway police on the trains. When are they going to be brought back?

Responses
Ms Kgare replied that RSR does not necessarily budget on the basis of penalties. In fact, they try and avoid it as much as possible because it is a variable revenue stream. It would create sustainability challenges for the regulator to rely on that. They rely largely on permits. Transnet and PRASA contribute substantially to that. RSR also gets a grant from the Department of Transport.

The Act provides RSR with three instruments to act against PRASA for non-compliance. 1. RSR can issue an improvement directive. This means the operator must provide an action plan on how they are going to improve. A lot of what is happening within the operator’s space may well be capital expenditure projects, which could be multi-year projects which means that some of the improvement directive will be open for quite a long time. 2. The Act provides if they do not comply, RSR raises a penalty. Most CEOs do not want to see fruitless and wasteful expenditure on their books, and therefore, it is a deterrence RSR can use. 3. Revocation of the operating permit. Members will be aware that when they attempted to revoke the permit, PRASA panicked and PRASA and RSR ended up in court.
 
Ms Kgare replied that the first slide shows that the Act states that the operator is primarily responsible for ensuring that there are safe railway operations. The role of RSR in ensuring there is a safe environment for railway is to provide a regulatory framework or an enabling environment for all operators to improve their railway operations. On the question about communication, all of those things would happen within the PRASA space. What the regulator does as empowered by the Act is to develop regulations, standards and guidelines that seek to address the challenges and how that should be done. Over and above that, RSR provides enforcement for adherence to those standards.

The RSR risk based regulatory framework is to ensure that it assists operators to improve to an extent that they are able to manage their own railway operations. One of the tools is the Safety Management System. A railway occurrence (accident and incident) is a symptom of a much larger problem that lies within an operational environment. It starts with somebody that does not have a Safety Management System. The Act states that the regulator will provide a performance contract to the operator and its role is to ensure that the operator develops a Safety Management System. One of the reasons RSR has focussed on the framework is because risk assessment is one of the key challenges for operators.

Ms Kgare replied that RSR does see that there is not much improvement with manual authorisation; the improvement is quite limited. Even in Gauteng there are lot of signalling problems, and the role as the regulator is to understand what creates these problems and identify that as a risk to PRASA. However, the responsibility is to ensure that the correct implementation strategies are in place within the railway operator environment.

Ms Kgare replied about RSR's focus on railway safety. If one looks at RSR reports one will see that there are three strategic outcomes:
1. Provide safe railways, which is where the bulk of its activities is located.
2. Sustainable institutional growth and development.
3. Improved stakeholder service

Mr Regardt Gouws, RSR Chief Financial Officer, replied that the initial lease contract was R38.2m for the 2018/19 to 2019/20 financial year. For the new contract, which has been entered into for all their buildings, it is R24m. There has been a cost saving of about R14m on the new contract. That is part of the recovery plan strategy they have implemented for costs saving for accommodation.

Mr Gouws replied that the after the 2018/19 AG findings, RSR decided not to have repeat findings and reduce the number of findings. Executive performance is tied to the operational plan to address the findings and reduce the number of findings and follow up with internal audit to get a clean opinion. The repeat finding was about disclosure of receivables.

The Chairperson interjected that due to time constraints, other questions should be responded to in writing. He thanked the RSR delegation for the presentation and responses.

The Chairperson noted that the PRASA presentation had been distributed to all Members to prepare for this meeting. Apparently, changes have been made and now a second presentation has been submitted to the Committee. If there are material changes to the original report, the Committee can choose to ignore the second report and only deal with the first report that was tabled to the Committee.

Ms N Tolashe (ANC) said PRASA must write a letter to Parliament and indicate the changes they have made to the original document so they could discuss it. But now they cannot discuss a document which has not gone through the processes of Parliament.

The Chairperson said the PRASA delegation is outside. They will be called in and they must explain the changes they have to the original presentation.

Mr Bilankulu agreed with Ms Tolashe. It seems they are dealing with people who determined do as they wish and it is up to the Committee to say this needs to stop or else they will not allow them to continue.

Mr Chabangu said PRASA is coming with a new document and the Committee is not agreeing to that new document. They must not be allowed to present this new document.

The Chairperson said PRASA will only be allowed to present the original document tabled to the Committee.

Passenger Rail Agency of South Africa (PRASA) 2018/19 Annual Report
Ms Khanyisile Kweyama, PRASA board chairperson, said that the Board of Control presents this Annual Report fully aware of the massive challenges faced by the Agency during 2018/1 pertaining to:
• Adherence to good corporate governance and ensuring organisational and leadership stability,
• Arresting the decline in the business performance, particularly the Rail business,
• Ensuring the availability, reliability, predictable and safe commuter and passenger service,
• Resolving organisational inefficiencies in the manner in which it deploys and manages its resources,
• Addressing and fixing massive irregularities reported by Public Protector, Auditor General, Treasury,
• Dealing with declining stakeholder confidence and a high rate of customer dissatisfaction.

The Annual Report confirms that PRASA still faces a massive cash shortfall on its operational expenditure budget, which has accumulated over several years, caused by rising operational costs, declining revenues, and a stagnant operational subsidy. Whilst the Board ensured that management implemented strict cost containment measures over the years by curbing and cutting costs where absolutely necessary, this has not yet improved the Group’s financial position.

Ms Kweyama noted these points from the 2018/19 Annual Report:
• Whilst the Board ensured that management implemented strict cost containment measures by curbing and cutting costs where absolutely necessary, this has not yet improved the Group’s financial position.
• This is due to operating costs increasing at a rate higher than own revenue generated and the subsidy.
• Total revenue was R13.7 billion at year-end, compared to total expenses of R15.5 billion.
• Own revenue has been on the decline due to the lack of maintenance, vandalism and theft of assets and the open nature of the rail system.

The Board instituted mechanisms to ensure that the business focused on:
• The protection of people, infrastructure and assets to ensure availability, reliability of the service -  
A Security Strategy was developed and approved.
A Safety Management Framework that guarantees the safety of commuters and passengers.
• An engineering and technical service to ensure reliability and availability of infrastructure and rolling stock –
A Rail Engineering and Technical department were consolidated into one unit focusing on quick turnaround in the maintenance of both infrastructure and rolling stock.
• Supply chain management policy that is timely and responds to the demand of the business.
A new Procurement Policy was approved and procurement committees established at both management and board level
• Modernisation programme that should transform the rail product
An accelerated capital management program resulting in increased spend on CAPEX has been instituted.

Dr Nkosinathi Sishi, Group Chief Executive Officer, gave a perspective on performance:
• In the last 8 years, PRASA has not been able to reach 60% of its performance targets. Only during 2015/16 did PRASA exceeded 50% of its pre-determined objectives by meeting 55% of its performance targets.
• The fact that PRASA still performs below 60% against its pre-determined objectives remains a worrying factor, as this suggests that the organisation is far from delivering on its mandate.
• The 2018/19 financial year fell short of expectations, where only 26% of the performance targets were met, even though this was better than 2017/18 where only 21% of the objectives were met.
• This suggests that PRASA continues to offer a service that is poor, unreliable, and unpredictable and that is not safe, thus resulting in the decline in customer and stakeholder confidence.
• Overall customer satisfaction rating had PRASA scoring only 48.11% across the business, compared to 56.14% the previous year.

PRASA's inability to meet its 2018/19 objectives was mainly due to the following factors:
• Availability of train sets which were drastically reduced due to vandalism and theft that required ad hoc maintenance and services to increase availability;
• Coaches out of service awaiting components due to non-availability of long term national supply of material and components refurbishment contracts;
• Cable theft and trains set alight which contributed negatively to coach availability.

Consequentially the poor performance is reflected in fare revenue collected for year:
• Both commuter and long distance passenger rail / bus services failed to meet R2.9 billion revenue target.
• Total fare revenue collected for 2018/19 was R1.5 billion – 15.9% below the budget.

PRASA operational challenges were noted:
• The entity is experiencing severe cash constraints. Payables from exchange transactions were R7 billion (2018 R6 billion) at year-end. R4.6 billion of this balance comprise payables from operations which it is not able to settle. A cash injection is required if PRASA is to continue as going concern.
• Fare revenue continues to be major a concern. It is on a downward trajectory while expenditure continues to rise. We have seen a decline of 16% in fare revenue compared to the previous year.
• Capital funds are not spent at a sufficient rate and capital spending has not translated into a higher return.
• It incurred irregular expenditure of R3 billion (2018 – R3.9 billion) in 2019. However most of it relates to transgressions committed in previous years. The accumulative balance at 31 March 2019 is R27.3 billion.
• Fruitless and wasteful expenditure of R51 million (2018 – R56 million) was incurred.
• It has R3 billion potential liability in the form of contingent liability cases. These cases are being defended.
• Insurance claims are on the rise as a result of train accidents. The provision for claims increased by an additional R843 million taking the provision balance to R2.1 billion.

Ms Lesibona Foshi, Group Chief Financial Officer, explained the audit outcomes:
• PRASA received a disclaimer from AGSA. The audit report includes qualifications on property, plant and equipment, change in accounting policy – first time adoption, irregular and fruitless and wasteful expenditure.
• There were material findings on performance information on usefulness and reliability.
• AGSA highlighted weaknesses in internal controls and compliance due to instability in executive level positions and lack of discipline amongst management.
• A number of material irregularities in procurement were highlighted.
• Management is immediately focusing on the internal control weaknesses identified in the audit.

Discussion
Mr Hunsinger welcomed the presentation. He said that it has been three years since the Public Protector's Derailed report about PRASA. However, a lot of positions are not filled, the 2018/19 annual report was submitted late and the PRASA board acknowledged that it is not a good report. It is a bad report with worse outcomes compared to even a year ago, which had better outcomes.

Mr Hunsinger asked how PRASA is going to turn around the 67% decline in passenger trips. What is the plan to get those coaches that are out of operation into full operation?

Mr Hunsinger asked what the plan is for the security cameras that are not working at the majority of railway stations throughout the country. R3bn of the PRASA budget was taken and given to SANRAL because PRASA was not able to spend it. How can the board justify that? The report states that PRASA is experiencing operational challenges because of financial constraints. How can PRASA experience financial constraints when it gave SANRAL R3bn out of its own budget?

Mr Sithole asked if is there any plan in place to address fruitless and wasteful expenditure at PRASA. Is there any consequence management mechanism that is utilised at PRASA?

Mr Sithole asked is there a plan to deal with the vandalism and burning of coaches.

Mr Mabhena asked what PRASA is doing to minimise operational occurrences and what measures it has put in place to ensure the safety of passengers which is paramount.

Mr Mabhena noted the decline in commuters and asked what measures PRASA has put in place to ensure that its commuters return and travel to work using trains.

Mr McDonald asked how much the court case cost PRASA when it took RSR to court.

Mr McDonald asked how much money was spent on private consultant services. How much procurement was spent on previously disadvantaged communities and suppliers? How far is PRASA in reaching compliance with the conditions set by RSR?

Mr Yabo asked about the unspent capital grant that was pushed up to 7%. He asked for clarity about employee costs which have moved up from R45m, but a 5% drop in employee costs is indicated.

Mr Yabo asked about the accumulated surplus which AGSA spoke about. He asked about the eradication of wasteful, fruitless and irregular expenditure. Why are there challenges to adhere to the legislation on procurement and contract management?

Mr Mey said that law and order must be a priority for PRASA because it concerns the safety of passengers. PRASA needs policemen on trains. It is its responsibility and without safety nobody will travel on trains. He asked if the manufacturing plant in Nigel is the future of South Africa and will manufacture more trains.

Ms Nolutshungu asked what measures PRASA has put in place to address the previous audit report when the new board came into office. What strategy has been put in place to deal with safety because its core function is to move people?

Mr Chabangu asked if there are systems in place to protect the assets of PRASA. Is the board equal to the task? Are members of the board qualified to run the entity? If yes, why is PRASA in this mess?

Mr Chabangu asked how PRASA is going to improve its service to its customers. Is PRASA going to pay the accident claims that have increased by R8.3m in 2018/19? The people PRASA is doing business with, are they black or white? Are they South Africans or Asians?

Responses
Ms Kweyama replied that the board does not run PRASA. PRASA is run by the executive. The Board is responsible for the strategy direction and they take full responsibility for that. The PRASA board members are people who are qualified, they have a proven track record. They have been selected and appointed by the shareholder of PRASA and have gone through the process of interviews as any board member is subjected to. As the Chairperson of the board she can verify that these board members are people who are qualified in all the fields required at PRASA, whether in finance, legal, engineering, or transport.

Ms Kweyama said it is important to put management instability into context. In the current reporting period PRASA had two CEOs in the rail division. That instability is not desirable in any company or organisation. They have advertised for a permanent CEO in rail. They have also advertised for a CEO in technical engineering so that they have stability and skills to ensure they are running with the strategy and deliver the service that is desirable to people.

PRASA has a history of irregular appointments. When the board came to PRASA they found out that investigations have been done on the irregular appointments at PRASA, not only of staff members, but also of contractors. They had to correct those irregular appointments. One of the pillars is the General Overhaul (GOs) which are responsible for maintaining the trains to ensure that they get back into operation. They have seen instances where trains went in for maintenance with new parts. The next day they are back at the workshop again because of the quality of work that was done there.

Ms Kweyama said that it is those previous contracts that the AG has raised in the 2018/19 audit as having material irregularities. Actually, if they can say there is a flop with this board it is because they were not appointed quickly enough. The contracts where irregularities were identified are not their contracts. This board has not perpetuated the practice of drawing up irregular contracts.

As the board was fixing this system, they first had to ensure that policy is in place because one of the areas identified by the Public Protector in the 2015 Derailed report was the supply chain management of PRASA. They have ensured that this policy is revised and rewritten so that they have a clear SCM policy for PRASA. It was a finding of the previous AG reports that there is no SCM policy in place. It will be appreciated by Members that without a SCM policy PRASA cannot procure properly.

Ms Kweyama replied about the acting positions and said they have appointed permanent people and the Chief Procurement Officer (CPO) will ensure that the rest of the people who are supposed to work in these positions are appointed and do their work.

Ms Kweyama replied that during this period they have advertised two key contracts that will have a very big impact on PRASA’s operations and security. That is the GO tender and the security tender, which are in process. Unfortunately, due to inefficiencies in the supply chain management system they have not yet been appointed.

Ms Kweyama replied about the R3bn that was taken from PRASA and given to SANRAL by Treasury. The Transport Minister Nzimande expressed disappointment about this. This was shortly after Minister Nzimande and the PRASA board were appointed when Treasury took the decision about the R3bn. These were the things that the board was faced with and which it had to correct.

Ms Kweyama replied about PRASA taking RSR to court. It was a very difficult time because over the years RSR had been putting conditions on PRASA for issuing a new licence. A licence was issued annually and RSR would put conditions for PRASA to meet. The PRASA board was only there for three months when the licence suspension happened. They had had several meetings with RSR asking that the new board be given time to put systems and procedures in place. Unfortunately, those meetings did not yield results. PRASA was faced with a situation where trains would not operate the next day and their passengers would not be able to go to work. Therefore, they had to resort to the courts so that RSR not suspend PRASA’s licence but allow PRASA to operate. The PRASA board has met 80% of the conditions posed by RSR to issue the new licence. And they are working very hard to ensure they meet 100% of those conditions. This was not a decision that was taken lightly to take RSR to court. It was a decision that was taken to ensure that their passengers can continue going to work every day.

Dr Sishi responded that they are very concerned about the performance reflected in the 2018/19 Annual Report. It should be stated up front that this team, particularly the executive, is very disappointed at this report. He assured the Committee that the 2016/17 and 2017/18 Budgetary Review and Recommendations Reports (BRRR) are going to be part of their turnaround strategy going forward. Equally the questions members have asked are helping them to gaze sharply at some of these challenges and they must apply their minds better to ensure that they turn around this organisation.

Dr Sishi replied that at an earlier meeting PRASA presented exactly how they have structured their war room initiative to turn around the decline in the passenger trains. They went into detail about what they will do about service recovery such as general overhaul of coaches, ensuring that in each of their regions improve the maintenance environment so that increased number of coaches will increase availability (see document).

They have covered all those issues in the scope. However, he can assure the Committee that already overall train performance has improved. For example, last month on the Pretoria line they introduced additional morning peak new trains, to increase from 22 000 to 50 000 people. The actual revenue increase that has been collected is more than 22%. This is just for one corridor. Their approach is to move from one corridor to the next to ensure they can demonstrate in a concrete way a turnaround in each region.

The Chairperson thanked PRASA for the presentation and responses. Due to time constraints, some of the questions must be responded to in writing. Under normal circumstances, he would have made this meeting very difficult for PRASA. Despite the challenges, PRASA was making slow progress that needed to be acknowledged.

The meeting adjourned.