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SOEs demonstrate galling lack of governance

23 SOEs run up irregular expenditure of R178.5bn.

Maybe, just maybe, the senior executives at the 20 or so state-owned entities (SOEs) should have ensured their financial governance was squeaky clean before meeting with President Cyril Ramaphosa last week.

Then they would not have had the spectre of why they had spent billions irregularly.

Read: The indaba between SOEs and the president 

In the interests of transparency, I thought it prudent to disclose the key findings arising out of the latest external audit reports on the annual financial statements of these SOEs. Some of them have been discussed at the state capture inquiry, but this article is only concerned with the 2018 external audit reports.

Our SOEs have demonstrated that they are quite adept at ignoring the National Treasury regulations, and contravening the Public Finance Management Act (PFMA) and the Companies Act. The SOEs who met with the President have run up irregular expenditure of a minimum of R178.5 billion by March 31, 2018.

This is a showcase for how the South African government has completely lost all semblance of control over these entities.

 

Irregular expenditure (IE)

Qualified audit report

Summary

 

Rm

   

Acsa

1 000

No

Errors corrected, no consequence management for IE, ongoing investigations regarding IE and supply chain management.

Alexkor

26

No

Reported to Irba for reportable irregularities, faulty procurement process, proper and complete records not maintained, no consequence management

Armscor

12

No

The review and monitoring processes were not sufficient to prevent IE

Atns

54

Yes

Not sufficient appropriate audit evidence to confirm all IE was accounted for, certain material misstatements were not corrected, effective steps not taken to prevent IE and F&WE, credit cards not used for permitted purposes, no consequence management, significant internal control deficiencies

Central Energy Fund (CEF)

3

No

Misstatements were corrected, hence unqualified audit opinion. There is no consequence management for IE.

DBSA

0

No

Material misstatements were corrected

Denel

513

Disclaimer

The AG could not express an opinion. He was unable to obtain sufficient audit evidence to provide a basis for an audit opinion. There is a material uncertainty relating to going concern. Financials were not submitted for auditing within prescribed period. Denel contravened IFRS, the PFMA, and the Companies Act. No consequence re IE. Contraventions in procurement and contract management. Net loss for 2018 R1.8 billion.

Eskom

20 713

Yes

R143 million fruitless and wasteful expenditure. Material uncertainty relating to going concern. Reportable irregularities have been reported to Irba. The total comprehensive loss for the year is R5.6 billion. No consequence management. Contraventions in procurement and contract management. Private business interests not disclosed.

IDC

0

No

 

Land Bank

0

No

 

Necsa

30

Disclaimer

The AG could not express an opinion. He was unable to obtain sufficient audit evidence to provide a basis for an audit opinion. Financial figures could not be verified. The current liabilities exceed the current assets by R153 million. Management did not provide the AG with sufficient appropriate audit evidence to support the going concern assumption. Irregular expenditure not disclosed in notes to the financials. Material impairment of investment in subsidiaries of R134 million was incurred.

PetroSA

2 463

No

Material uncertainty related to going concern. Net loss of R666 million. Impairment loss of R240 million on property, plant and equipment (PPE).  Impairment loss of R1.2 billion on investment in subsidiaries. Financials didn’t receive a qualified opinion as misstatements were corrected.

Prasa

25 200

Yes

Material uncertainty related to going concern. Didn’t have an adequate system for identifying IE and wasteful expenditure, nor for property, plant and equipment. Unable to obtain sufficient appropriate audit evidence. Net loss R924 million. Management only corrected some misstatements on the performance reporting, and the AG raised material findings on the usefulness and reliability of the reported performance information. PFMA was contravened as the financial statements were not submitted for auditing within two months after the end of the financial year end.

Rand Water

117

No

Misstatements were corrected hence unqualified opinion. The cause of the bulk of this IE is due to the inability of the organisation to respond timeously to regulatory prescripts and practice.

Notes issued by National Treasury on procurement.

SA Express

Yes

Yes

Only the 2016 annual report is available. AG report qualified. IE unquantifiable. The entity did not have an adequate system for identifying and recognising all IE. Wasteful expenditure: R30.6 million.

SAA

113 600

Yes

Only the 2017 annual report is available. The SAA group did not establish adequate controls to maintain complete records of IE. The qualified report was based on inadequate systems in regard to property, aircraft and equipment, inventory, maintenance costs, IE and wasteful expenditure. Net loss was R5.569 billion at 2017, and liabilities exceeded its total assets by R17.801 billion. Fruitless and wasteful expenditure: R42.6 billion.

SABC

4 997

Disclaimer

Net loss R621.6 million. Liabilities exceeded assets by R291.6 million. The entity was commercially insolvent. Can’t account for all PPE. AG unable to obtain sufficient appropriate audit evidence for PPE, and many other financial figures.

Safcol

592

Yes

Not all IE recorded. There were many accounting errors, and prior period figures had to be restated. However, supporting information was not provided, so not all necessary adjustments could be made.

Sanral

347

No

The accumulated loss is R14.5 billion.

SA Post Office

109

No

Material uncertainty related to going concern. Total loss for the year R908 million. Accumulated loss R3.3 billion.

Trans-Caledon Tunnel Authority

618

No

Effective and appropriate steps were not taken to prevent IE. Some of the goods, works or services, procured by the public entity, were not procured through a fair, equitable, transparent, cost-effective and competitive procurement process. 

No consequence management.

Transnet

8 100

Yes

External Auditor unable to obtain sufficient appropriate audit evidence to confirm IE. Management only corrected some misstatements on the performance reporting, and the External Auditor raised material findings on the usefulness and reliability of the reported performance information. PFMA was contravened as the financial statements were not submitted for auditing within two months after the end of the financial year end. Significant internal control deficiencies. Appropriate risk management activities not implemented.

Umngeni Water

33

No

 

 

178 527

 

 

It should be noted that an unqualified opinion does not, in my opinion, exonerate a company from contravening IFRS, and the PFMA. Where misstatements were detected by the external auditor, and subsequently corrected, an unqualified audit opinion is given. A ‘material uncertainty’ related to whether the entity is a going concern does also not result in a qualified opinion.

The hall of shame: Forensic investigations and litigation

Some of the SOEs in the spotlight are undergoing forensic investigations into serious issues other than IE and/or are embroiled in ongoing litigation.

In the case of Alexkor, the Minister of Finance has initiated an investigation into alleged irregularities regarding awarding of the diamond marketing tender to a supplier.

The CEF is a defendant in a number of litigation matters, the most significant of these relates to the court application to set aside the disposals of crude oil stock on the basis that the disposals were unlawful, invalid, and unconstitutional. A forensic investigation is being carried out by an independent consultant around matters relating to a contract review process conducted at Strategic Fuel Fund Association NPC, a subsidiary of the CEF.

Eskom too is under scrutiny in ongoing investigations into alleged irregularities, fraud and corruption at the power utility.

Petro SA has an obligation to rehabilitate and abandon its offshore and onshore operations valued at R8.1 billion with cash set aside of R2.4 billion and therefore the provision is currently underfunded by approximately R5.7 billion.

Four investigations currently being undertaken by the South African Police Service’s directorate for priority crime investigation (Hawks) are looking into allegations relating to financial misconduct, fraud and improper conduct in supply chain management:

  1. Alleged failure by the entity to follow competitive bidding processes in appointing a legal firm for the Sabre deal. The award to the company was concluded on January 12, 2012. The investigation is still in progress.
  2. Alleged failure by the entity to follow competitive bidding processes in the appointment of PetroSA’s transaction advisor in respect of Project Irene. The company was appointed on November 8, 2011. The investigation is still in progress.
  3. Alleged unauthorised change in the financial recommended terms and conditions of the acquisition of upstream assets in March 2012. It is alleged that additional fees were added onto the purchase agreement without the approval thereof by the board. The investigation is still in progress.
  4. Alleged unauthorised change in the financial recommended terms and conditions of the PetroSA-Sabre acquisition agreements. It is alleged that in December 2011 the purchase price for Sabre was increased without board approval and was unfavourable to PetroSA. The investigation is still in progress.

Prasa is facing an ongoing lawsuit related to the purchase of locomotives. Forensic investigations arising out of the Public Protector’s 2015 report are ongoing. The Directorate for Priority Crime Investigation is investigating cases reported by Prasa in terms of the Prevention and Combatting of Corrupt Activities Act.

In the 2017 AG report, paragraph 17 states that: “SAA did not report the reasons for not adopting a resolution to file for business rescue while the company was in financial distress to the affected parties, as required by section 129(7) of the Companies Act.”

Read: Goodbye, SAA

The Special Investigations Unit and the forensic unit of the SABC are in the process of conducting several investigations into instances and allegations of financial misconduct and possible fraud.

Safcol is experiencing ongoing litigation in regard to fires. Read: Safcol irregular expenditure ballooned to R592m in 2018

An investigation into allegations of maladministration and irregular procurement processes relating to the Gauteng e-toll contracts at Sanral was conducted by the Public Protector, in terms of Section 182 of the Constitution. This investigation was concluded on January 30, 2018. Secondly, the Directorate for Priority Crime Investigation is currently investigating offences perpetrated against Sanral by various construction companies. This investigation has been ongoing since 2013.

Transnet is facing ongoing investigations into alleged irregularities and potential fraud. Lease agreements were entered into with lessors without following formal lease application processes. The group instituted investigations into alleged procurement-related irregularities on the acquisition of 1 064 locomotives.

Read: Transnet dismisses CEO amid procurement probe

The PFMA requires that financial statements have to be submitted for auditing within two months of the financial year-end. I wonder how many SOE’s have already ignored this requirement?

How many SOEs have inadequate systems of internal control and recording of financial statements?

How many SOEs cannot even determine how many assets they have?

How many more SOEs have a material uncertainty relating to going concern?

How much more irregular expenditure has been incurred?

The hall of shame is on the rise.

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COMMENTS   33

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No long after 1994, the MAIN ISSUE was “AA/BEE/Transformation” of all SOE’s. One will notice all SOE’s BBBEE/AA scorecard are impeccible. Transformation thus successfully achieved. Very commendable.

That was ALL that’s MATTERS.

Hence, please do not bring other issues up now. All’s good. No need for any funding. Why? (Remember, the record is impeccable)

Spot on Michael (really from Klerksdorp !!):
They the ANC have achieved their aim : Transformation in every case into an utter shambles : Actually considering the calibre of the ANC top 6 as an example , its actually amazing that anything works at all !

“Transformation” indeed. Into a “meltdown basket case” country, as described by another commentator or more descriptively by Trump as a certain type of hole. They took offence at Trump’s description, which clearly confirms they suffer from a serious case of the Dunning-Kruger Effect.

Time for a tax revolt. Pay your tax on the last day possible. Pay your staff PAYE as late as possible.
Maximise your deductions. Move as much as you can offshore.

Outstanding and thought provoking article. Well written and super summary.

A true indictment on the ANC policy of BEE/AA-it has failed dismally. Just look at the colossal losses. But best of all is this new term ie IE-its theft and fraud!

The entire NEC should commit hara kiri

Its OK!

Money grows on taxpayer’s trees, revolutionary cadres have phd’s in Economics and South Africa is going to win the cricket world cup!

Go short the rand and make a fortune.

Oh. a billion here, a billion there, soon you’re talking about real money.

If only the masses qualified to vote were also able to read and do some basic arithmetic. Sigh …

I paid enough personal income tax last year to buy a top of the range, brand new, Range Rover (if I was feeling a bit of a chav moment of course). It goes into a pot where these gangsters can freely put their fingers! Now why would I keep doing that? Here’s the thing, I’m not going to. Cheers Kleptozania and may you all stand next to the street looking for work, or keep waving your roadside construction flags with gusto. You voted for them, you deserve them, have a blast

Pamplona, I have made hypothetical assessment on your situation. I came to the conclusion you deserve your new Range Rover 😉 It will be money better spent. (Govt just wastes it)

I don’t consider myself wealthy at all, but I subscribe to the notion to reduce into tax for the wealthy, if you want to see the wheels of the economy turning!

Even I feel that my tax could’ve paid for a (albeit used) FIAT 500 Cabrio 😉

You made my day MFK!!! I don’t want to give these thieves a Matchbox car!

A billion spent over 20 years equals 136 892.53 per day, every day. For the figure of 178.5 billion it is 24 435 316.60 per day, every day. Should be charged with treason, all of them.

Remember you gushing statement made in 1994 anc?

“We are ready to govern”!

What a crock that turned out to be!

“The real cost of the State is the prosperity we do not see, the jobs that don’t exist, the technologies to which we do not have access, the businesses that do not come into existence, and the bright future that is stolen from us. The State has looted us just as surely as a robber who enters our home at night and steals all that we love. – Frederic Bastiat

Excellent and most appropriate quote. Thank you. Not constructive, but that is the reality unfortunately. Sad.

So, the accumulated losses at SANRAL are now more than double the original GFIP costing. Little wonder. The only way they are avoiding technical insolvency is by revaluing their road network, as if there were a string of buyers looking for an N1.

SANRAL was warned repeatedly that e-tolling was a bad idea. They ignored that advice. Now it is time for someone to go to jail, starting with the then-board of SANRAL. Since a court has already found (HMKL Investments vs. SANRAL, NGHC, 2011) that SANRAL failed to conduct the necessary research and EIA which was required to place the Minister of Transport in a position to properly assess the toll road declarations, I’d be astonished if no laws had been broken.

This is the same board for which CEO Nazir Alli invented an entire board resolution in his affidavit in the Winelands case. How the SCA let him off a perjury rap for that one is anyone’s guess. If SAPS was less somnolent, John Clarke’s perjury charges against Alli might already be before a court.

Still, until a few directors of these rogue agencies get locked up, service on an SOE board will continue to be regarded as a golden crib for deployed cadres at the taxpayers’ expense, instead of a weighty responsibility.

Super article. Hope the government reads it. If not them then the DA.

The government read this article? Never. Even if they did, it would be considered “fake news”. “There are none so blind as those who will not see”. And they are seriously blind, with the added disability of suffering from the Dunning-Kruger Effect.

Informative article, well written.

“SA government …completely lost all semblance of control over these entities.”
Yes, hence SARB and its mandate has become so tantalizing…

And then you can add the Arms deal, actually chicken feed, Inkhandla, Estina, government travel, housing etc and all the Zupta millions that just disappeared.

Deployed Cadres, Comrades, Socialism / Communism – this scenario was totally predictable. Excellent but frightening article !

Exactly, the state of affairs was so predictable.
I just cannot understand why people are so shocked by the “state of affairs”, no other outcome was possible.

Note to journalists reporting on the constant discoveries of malfeasance committed by out dear government, the ruling criminal cabal and related sycophants: It might be useful to add a translation to the values in monetary terms to something more understandable to the majority of voters i.e. each million Rand = x number of RDP houses / x number of schools catering for 1,000 pupils (or learners as currently preferred) / x number of clinics etc.? Then these statistic might be spread by word of mouth to the illiterate and poor? Just a thought.

As the lead commentator on this specific article, I appreciate everyone’s up-votes & follow-on comments!

Interestingly, after reading all comments thus far, I CANNOT FIND any single person that has anything overtly NEGATIVE TO SAY.
I view my fellow MW-commentators as REALISTS, pure and simple.

Mene, mene, tekel, upharsin. Or loosely transated, the chickens have come home to roost as they always do. As an eternal optimist, on the upside, just this: if you know what’s coming down, you can plan accordingly. The outcome of all this is 100% self inflicted and 100% totally predictable. Forewarned is forearmed I say.

Excellent article and comments. Can you imagine what this “scorecard” will look like after another 5 years of ANC “rule”?

Maybe, just maybe, unlike most journalists, Barbara Curson with her CA(SA) and post-grad qualifications actually does know the difference between Irregular expenditure and Fruitless expenditure? and the difference between material and immaterial findings w.r.t. irregular expenditure? Unfortunately even with that knowledge those important distinctions have (again) been ignored in this hack piece. Yes there are governance and leadership problems at our SOEs but “irregular expenditure” as defined by National Treasury and the AG with their every changing rules and interpretations should not be reported as “evidence” thereof. Probably over 90% of “irregular expenditure” is immaterial (i.e. minor procedural mistakes or differences in interpretations of the regulations with goods or services still provided, no loss to government, the correct service provider was still appointed, etc). In fact the national fixation on “irregular expenditure” and “clean” audits over the past 25 years has resulted in all the every increasing layers and layers of regulations, procedures, reporting, monitoring, evaluation, navel gazing and red tape that has strangled service delivery, moral and innovation at all government departments and even SOEs (that were originally supposed to operate more unencumbered like the private sector). Just look at the current organogram of any SOE or service delivery government department and you will see it dominated , not by professionals and technical staff, but by finance, supply chain and HR staff, all diligently following extensive procedures and working to try achieve a “clean” audit – all too often at the cost of actual service delivery and value for (tax-payers) money.

Or one could wind back the clock to the pre-Zuma era and discover that, regardless of definitional semantics, irregular and fruitless / wasteful expenditure were fractional by current standards.

The problem is not regulation. The PFMA predates most of the problematic SOEs, the MFMA predates most of the problematic municipalities, and the Companies Act and its predecessors predate them all, even Eskom which was founded in 1923 by statute. Ditto for regulation governing the civil service, of which many SOEs used to be part.

The problem is wholesale looting by incompetent management parachuted into their positions by adjacency to the ruling party and abetted by self-serving politicians.

Rob, The PFMA and MFMA may still be (more or less) the same but the regulations and guidelines have changed – numerous times, way too often for officials to properly implement and achieve any consistency. Plus every year sees a fresh batch of AG interns eager to scratch and scratch and argue interpretation to achieve their “number of findings” KPI’s. Irregular expenditure simply does not equate to wasted, looted or lost expenditure. If something as simple as an original signature is missing somewhere in the multitude of steps and paperwork required to procure something then the entire purchase must be declared “irregular” regardless whether the error was material or not (and it is overwhelmingly NOT material). This could be a pen or a multi-year multi-billion Rand construction project – all is counted as irregular. The reality behind the failures in SOEs is far more complex than portrayed in the press and inaccurate and misdirected articles like this one do not help is identifying and solving the problems.

@Umlungu. Based on your view that matters are not as bad as it seems with SOE’s finances, I’m glad we can thus agree that SOE’s do NOT NEED any bailouts from Govt?

What I’m saying Michael is don’t naively believe what lazy journalists write and uninformed people repeat.

I can’t reply to Umlungu, so I’ll add my reply to him to your point.

Go to SANRAL’s annual reports from 2013 to 2017. The regulations have not changed meaningfully over that period in terms of how expenditure is classified.

Then look at the irregular and fruitless / wasteful expenditure which went from negligible to R3bn, a massive percentage of SANRAL’s turnover. That is not lazy journalism or uninformed opinion. It is fact which cannot be wished away by sophistry. It is incompetent management from people who are under government’s wing and know they are exempt from consequence management.

Smacks of guesswork and whataboutery Umlungu; bottom line is what matters; money is disappearing. Sure the regulations are onerous and auditors sometimes over-zealous but the fraud and theft still happens on a large scale. Look at the eThekwini mayor case; tip of iceberg. See Rob’s comment about the dishonest Nazir Alli (not to mention the vain and irresponsible stupidity of building a toll road along the Wild Coast and KZN DoT rebuilding Sani Pass; idiotic waste). The symptoms are there and becoming worse, the media is just too polite about the levels of incompetence and graft at the top mostly.

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