Compensation Fund on its 2014/15 Annual Report: hearing

Meeting report

The Chairperson advised the meeting that there was supposed to have been an oversight visit to the Compensation Fund in order for the Committee to discuss certain issues. However, this had not happened, so the Fund had been called to Parliament. The Director General (DG) of the Department of Labour (DOL) had informed the Committee that he was going to be out of the country and would like to be present at that meeting, so the Committee had postponed it. He extended his thanks to the DG and said the Committee was impressed that the DG was keen to come and account for the good and the bad.

Mr T Brauteseth (DA) asked if Mr Vuyo Mafata, Acting Compensation Commissioner, had replaced Mr Shadrack Mkhonto, and how long he had been in the position.

Mr Mafata responded that he had replaced Mr Mkhonto and had been in the position for eight months.

Mr Brauteseth asked why the Chief Financial Officer (CFO), Mr Johnny Modiba, was not present at the meeting.

Mr Thobile Lamati, Director General, DOL, said the CFO was still under suspension because of financial misconduct and the disciplinary processes were still under way. He said the Acting Commissioner was the CFO of the Unemployment Insurance Fund (UIF), and therefore he was very competent on issues relating to finance.

Mr Brauteseth asked how long Mr Modiba had been under suspension and the reasons for his suspension.

Mr Lamati said the CFO had been under suspension from April last year and this was because of financial misconduct allegations against him. The CFO had been delaying the process by not being available when the disciplinary process was due to take place.

Mr Brauteseth asked why the matter was dragging on, because from his understanding it should take about six months for a person to remain under suspension. The Department should have proceeded with the case of the CFO’s suspension.

Mr Lamati said the Department did not have control over the hearing process and there was an independent chairperson.

The Chairperson asked if the CFO was on full pay.

Mr Lamati said he was on full pay.

Mr Brauteseth asked how much the CFO was getting while sitting at home.

Mr Lamati said the CFO was getting paid R1.2 million a year.

Mr Brauteseth said he would like the Department to provide the Committee with a report detailing the inception of the case until this point. This matter needed to be evaluated and he did not think it was out of line to ask for this, as the Committee needed to explain to the public why a man was getting R1.2 million a year while vacationing at home.

The Chairperson asked if the Committee could get this report in two weeks’ time.

Mr Brauteseth said he had an organogram from the Auditor General (AG) as at 31 March 2015. He asked the DG to name the people that had been removed, how long they had been on suspension and where they had gone.

Mr Lamati said a person who had been removed was Mr Shadrack Mkhonto, Commissioner of the Compensation Fund, who had been moved to another position within the DOL.

Mr Brauteseth asked why Mr Mkhonto had been moved.

Mr Lamati said Mr Mkhonto had been moved in an attempt to change the way things were done at the Compensation Fund -- to inject some degree of organisational effectiveness. He had felt that he needed to redeploy the leadership of the entity, because the then leadership was too familiar with the environment and therefore not adding the required value in the entity. Another person who had been removed was Mr Simon Nkhabelane, Director, Organisational Effectiveness, because he thought the organisation was not effective at the time. He said Mr Nkhabelane had been moved to another position within the DLO. He said Mr Tshepo Mokomatsidi, Chief Director of Corporate Services, had been moved for the same reasons as Mr Mkhonto. Ms Kefilwe Tselani, Director Medical Services, had also been moved because she did not have the prerequisite qualification and competencies for the position. She had a legal qualification and he felt that she was misplaced. She had been moved to support employment enterprises.

Mr Brauteseth said these people had effectively been responsible for the collapse of the entity and instead of taking action against them, the DG had given them other jobs. He asked the DG if this was a fair inference.

Mr Lamati said the reason for moving these persons was because of the investigations that were currently under way. Once the entity received the outcomes of the investigation, it would act on the recommendations.

Mr Brauteseth asked whether the people moved were the subject of the investigation.

Mr Lamati said the investigation at the Compensation Fund was wide, so these people may be implicated.

Mr Brauteseth asked when the DG was expecting the results of the Special Investigating Unit

(SIU) investigation

Mr Lamati said he had been told that the investigation had been completed either in November or December of 2015, and the report had been sent to the Minister of Justice and Correctional Services. However the Minister of the DOL had not received a copy of this report.

Mr Brauteseth asked if the Chairperson could ask for a copy of the report from the Minister of Justice and Correctional Services. He asked how long Ms Boitumelo Gumbu, Head of Internal Audit, had been in the position and who was there before her.

Mr Lamati said Ms Gumbu had started in January 2015. The position was a newly created one because of the disclaimers the entity had received. The position had been created to improve the Department’s internal controls and address issues that had been raised.

The Chairperson asked if there had been no internal audit unit before, and if so, what did the Department have?

Mr Lamati said he thought there had been an internal audit unit. However, there had been no director.

The Chairperson asked how long the DG had been in his position

Mr Lamati said he has been in this position since 1 December 2014.

Mr Brauteseth asked if Mr Nkhabelane was present at the meeting.

Mr Lamati said Mr Nkabelang was amongst the people the Committee had felt should be removed from the Compensation Fund, and he had been replaced.

Mr Brauteseth said the Minister had told the Committee there would be quarterly reports to the Committee from June 2015. Therefore there were two progress reports the Committee should have received. He asked if these were just empty promises.

Mr Lamati said his understanding was that the Department had been given until December to have interaction with the Committee, and the Department had duly submitted the report in December. Therefore, with regard to what he thought had been recommended by the Committee, the Department had complied. If he had missed the fact that the Department had to submit quarterly reports, he apologised, and if this was the requirement the Department would submit quarterly reports.

Mr Brauteseth repeated the letter sent by the Minister to the Committee and said that from what he had read, the Committee should have received a review report from June 2015 till today.

The Chairperson proposed that the Committee should rather ask for a report from the Department covering the present, and moving forward on a quarterly basis.

Mr Brauteseth asked the DG to give details of the criminal cases reportedly involving R8 million. How many people were involved and what had been done by the Department?

Mr Lamati said the Department had a number of fraud cases, and the report covered 11 cases that had been referred to the South African Police Service (SAPS) for further investigation.

Mr Brauteseth said on page 15 of the report, there had been a breakdown of all the Department’s matters and there had been only one mention of the SAPS. The amount of R8 million was way too much and the Department should identify the people who were involved in this matter. He said there were figures missing in the report, because they did not add up to the R8 million.

Mr Lamati said on page 20 of the report the Department did refer to the amount, the trial date and the state of the cases. What the Department had not added on this page were the names of the people affected by the case.

Mr Brauteseth that the cases reported were old, and said the Department should provide the Committee with cases that were recent. He also said that the amount shown must add up, because on the current report the amounts did not add up. In terms of revenue and receivables, what were the Department's thoughts on the transactions involving non-exchange receivables?

Mr Mafata said there was one rate of interest charged for all debtors. He said that in the action plan, the Department had provided the steps the Department would follow to deal with this.

Mr Brauteseth asked if there was an element of fraud in the issue of revenue.

Mr Mafata said no fraud had been found in the AG’s report.

Mr Brauteseth asked the Department to comment on the issue of funds being used incorrectly. Why had the entity been impaired, from R11.353 billion down to R9.49 billion? Did this mean the Department had received R2 billion less from contributors, because there had been no information found by the AG to justify this?

Mr Mafata said the impairment referred to the recoverability of the debts that the entity would have to raise. This impairment did not refer only to 2014/15, but to figures dating back to prior years. In the action plans, this had been highlighted as one of the issues the Department needed to work on  because it did not relate only to revenue but to the Fund’s accounting processes as a whole.

Mr Brauteseth asked if the Department anticipated that this figure would change in the Department’s quarterly report.

Mr Mafata said say the Department did anticipate a changed figure. This was already happening -- the entity was paying the correct beneficiaries. The issue was just the accounting treatment of recording them in the correcting periods, and making sure that adequate supporting documentation was provided.   

Mr Brauteseth asked if the Department was able to break down which cases were irregular and which cases represented fruitless expenditure from the 120 cases highlighted in the report.

Mr Lamati said on page 220 of the annual report there was a breakdown of how much was fruitless expenditure and how much was irregular expenditure. He said fruitless expenditure amounted to R32 million.

Mr Brauteseth asked why there was a backlog of 42 cases.

Mr Lamati said the 42 cases were cases that the Department had been carrying since the previous year. The reason for this was the fact that even when the Department had done an investigation, it had not been able to finalise it. There were 17 new cases, however. The reason there was a backlog was because of the lack of the capacity the Department to do investigations and finalise the matter because of the complexity involved in financial misconduct.

Mr Brauteseth asked how many people involved in the 42 cases were on suspension.

Mr Mafata these were cases that would have been reported on the fraud hotline, so no internal or external parties were implicated.

Mr Brauteseth asked what was happening with the 42 cases, and why they could not be resolved.

Mr Lamati said he had not said the cases could not be resolved, but there were complexities in terms of resolving them within a short space of time.  However, the Department could provide the Committee with a breakdown of where it was with these cases, and what the nature of the cases were.

Mr Brauteseth asked if the 42 cases were part of the 114, and asked the Department to give the Committee a report on this.

Mr Lamati told the Committee that it would be providing it with this report.

Mr Brauteseth also asked the Department to report on the 17 new cases. The Department should also provide the Committee with the names of the persons involved in the cases. He asked if the Department could provide the Committee with information on when the guilty findings were issued. He said that the Department should also look into its disciplinary processes.

Mr Mafata said this had been finalised by the presiding officer at the beginning of February 2016, so the Department was basically awaiting the presiding officer’s report so that it could implement the sanctions.

The Chairperson asked if the Department had any idea as to when it would get the Report.

Mr Mafata said the Department had been promised the report by the beginning of March 2016.

The Chairperson said the Department should be leading by example and be firm about these processes, because they were supposed to be the custodians.

Mr Brauteseth asked if Mr Mafata would be the new CFO or if he would continue being an Acting CFO, because it would really be good to get a permanent CFO. He was not entirely happy that the people involved in the misconduct were still within the Department. The Department should get Mr Modiba’s case finalised, because 11 months was too long.

Mr D Ross (DA) asked how close the Department was to finding solutions to revenue and receivables. He could see by the commitments made by Mr Mafata, he was trying to address systemic issues and this he based on the audit history.  On the disclaimer the Department had received in terms of the revenue, it seemed there was a rectifying mechanism in terms of the impairments, i.e. how to balance the revenue ultimately. The problem had been coming since 2009/10 and to him it was due to a lack of oversight in terms of a systemic problem that needed to be balanced by the AG. He said the AG’s recommendation seemed to him to be very weak. He asked the Department to highlight the issue on revenue, and asked for an explanation with regard to the management of the entity.

Ms T Chiloane (ANC), referring to the movement of some of the officials from the Compensation Fund to the DOL, asked why the Department would want to move someone who had sunk the ship to another position. This decision was not really fair to the South African public, who were funding the entity. On the benefits paid and payables, these were issues that had been raised by the AG since 2009 until now. What systems were being used by the entity that allowed these challenges to continue?

Mr Lamati said, on the issue of revenue collection, that the action plan provided the steps that had to be taken by the Department. Regarding the leadership, the problems had been with the Fund since 2010 and should have been resolved, which was why the current leadership was making it its business to resolve them. His priority as the head of the institution was to make sure that the needed changes were effected.

He took the point that he should have disciplined the people involved, instead of moving them to other positions. In his logic, it would have taken him long to discipline these people. The second thing was that people did not have the competence to perform their work, the Compensation Fund was a complex scheme with four businesses, so people were in positions they were not competent to execute. He therefore had taken the decision to rather place the people in positions that were suited to their skills and competences.

Mr M Booi (ANC) said the DG was not speaking about his personal finances and should therefore not refer to himself when he spoke about public finances.

Mr Lamati said he was taking the point that certain individuals seemed to have been moved in order to shield them, but this was not the case. He could commit in front of the Committee that there would be an investigation undertaken in terms of what had happened at the Compensation Fund, and what had led to the challenges it faced. He wanted to create an environment where the entity could effect change.

The Chairperson said the measures the DG had taken to change the leadership had been appropriate.

Mr Booi said the levels of corruption in the Compensation Fund were very high, and people were being shifted from one position to the other. The DG was not telling the Committee the truth. The Committee would not wait for the DG, but would have to take over the investigation and deal with it. SCOPA would not be waiting for him while within the Department there were friends promising each other not to take the required measures against each other.

Mr Lamati said he had indicated that the he understood the gravity of the situation at the Compensation Fund. He did not have friends at work, but colleagues, and there was no one he would go out of his way to protect. This was not how he did things. The last time the entity had a meeting with the Committee it was stated that it was in a serious state, and it was said the Committee and the Department had to assist to get it out of the quagmire it was in. The structure responsible for fraud was an independent structure, and did not work with the Department.

On the question of whether the structure had enough capacity, he did not think it had, hence in the report it had been indicated that there were a certain number of cases that had been reported to the SAPS.

He said the reason he constantly used “I” was because at the end of the day, a decision could be taken at the Department as a collective but the buck stopped with him as the head of the Department. Therefore, if things did not happen as they should, the Committee would have a problem with him and not the rest of the Department.

Ms N Khunou (ANC) said she shared the sentiments of her colleague, that when the DG referred to “I” it seemed that he worked as an individual rather than working with the other officials within the Department. Even in the manner in which the DG was answering questions, it seemed that he was working alone.

The Chairperson said that in terms of the Public Finance Management Act (PFMA), he was the accounting officer for the Compensation Fund. Therefore, when the Fund came to Parliament, he was the person that should be talked to, and for once the Department had a person who wanted to account for his responsibility and not shift it on to others.

Ms Khunou said she understood this perfectly, but the issue was that the DG was either working with the leadership of the Compensation Fund, or was he working as an individual. She asked for each delegate from the Department of Labour to state their qualifications.

Mr Lamati said to address the financial issues, a project manager had been appointed for financial management and the person would start in April 2016. There was also a Director of Human Resources who had been appointed and would start on 1 April. A Director Legal had been appointed, who had started on 1 March 2016, and a Director Financial Reporting and Director Income would both be starting on 1 April 2016. The Director Organisational Effectiveness had started on 1 July 2015. A process was under way to find a replacement for the Chief Director Cooperative Services.

Ms Khunou asked why there were so many consultants. Had the money the consultants were getting paid been budgeted for?

Mr Lamati said the Fund had indeed budgeted for these services. However, the number of consultants at the Compensation Fund had dropped, and there were currently about 12 active consultants.

The Dhairperson if the 12 referred to companies or warm bodies

Mr Lamati said he was referring to 12 different companies which work on different things within the Fund. He did not think that this was something the Fund could sustain. The risk management committee of the Compensation Fund had been telling it to develop its own internal audit system and therefore the entity was on its way to doing this, so the contracts of the service providers would not be renewed because the entity was bringing capabilities into certain areas. The only contract that would be renewed would be of the Information and Communications Technology (ICT) consultants, because of the challenges within this section.

Ms Khunou asked if the entity received value for money from these consultants.

Mr Lamati said there instances where the entity did not get value for money. The entity was thus currently trying to correct this. He had asked the CFO in the DOL to send out a circular giving a direction on how to deal with consultants, whether there had been transfer of skills, and what value the DOL received from these consultants.

Ms Khunou asked what the penalties were directed to the consultants who did not deliver.

Mr Lamati said the entity always had a service level agreement (SLA) which spelt out details of what it wanted from the consultants, and the conditions and consequences if they did not deliver. However, there were instances at the entity where these agreements had not been signed and therefore this was what the current leadership was trying to correct.

Ms Khunou asked if there were any mechanisms in place where consultants had been given penalties in cases of unsatisfactory deliverance.

Mr Mafata said the entity paid only for services that had been delivered. One of the things that the entity had recently introduced was the issue of penalty clauses on all contracts that are signed. Thus if services are not delivered within the required timeframe as stated by the contract, the entity levied penalties on the provider.

Ms Khunou asked what “RMA” was.

Mr Mafata said this was the Rand Mutual Association -- a licensee of the Compensation Fund to perform exactly the same function that the Fund did, albeit in the mining environment

The Chairperson asked the DG to for a more detailed explanation.

Mr Mafata said RMA was a Compensation Fund in the mining sector and they operate under the licence of the Compensation Fund. They collected contributions and paid benefits on behalf of the Compensation Fund, but for the mining sector. It was the same thing with the construction industry.

The Chairperson asked who monitored the RMA and how to they accounted to the entity for the funds collected.

Mr Mafata said they were being monitored by the Office of the Commissioner and they had a service level agreement. They had a board on which the Commission serves. They equally served on the  Compensation Fund board There was therefore constant contact with them and the licence was reviewed and renewed from time to time.

Ms Khunou asked if RMA would be paid R11 million every year.

Mr Mafata said the entity was using the RMA system, called uMehluko, and they had to be paid maintenance fees because of this reason.

Ms Khunou asked why the Department could not have its own system like the uMehluko, since it was so good.

Mr Mafata said an option would be to negotiate with RMA to buy the system.

Ms Khunou said the Department should provide the Committee with a plan, rather than daydreaming.

Mr Mafata said it had a plan in place.

Ms Khunou asked for a budget of the funds that the Department was paying the consultants once they were phased out. She asked what the backlog of the beneficiaries was.

Mr Mafata said the Department had not published the budget for 2015/16 financial year. The Department did not have a backlog.

Ms Khunou said that on some of the pages of the report, it was not indicated that the Department did not have backlog. She asked if the entity’s offices were in all provinces, because she wanted to understand the R11 million it was paying for rental. Was there no way the entity could reduce this?

Mr Lamati said the Compensation Fund operated in all the provinces and shared space with the DOL. As part of their repayment of rent, they paid this amount.

Mr M Hlengwa (IFP) asked how many of the delegates at the current meeting had been with the entity for the full duration of the financial year under review. He said the Committee was posing questions and the people who had caused the collapse at the entity were not present at the meeting. He would have imagined that if the people had been shifted to other positions within the Department then the DG should have brought them with him to come and account. Therefore the people present at the meeting could not assist the Committee with what it was trying to do.

He asked where the audit committee was and where the quarter on quarter reporting was. The AG had come in and found that the financial statements contained material misstatements. Was the audit committee effective?

Mr S Manquku, representing the chairperson of the audit committee, said the audit committee had actually raised similar concerns. One of the things the audit committee wanted was for the manager to respond and implement the audit committee’s recommendations

Mr Hlengwa asked if corrective action had been taken by management to address the concerns raised by the audit committee.

Mr Manquku said that as a committee, they were concerned at the manner and speed at which management had reacted, but they were aware at the same time that because of the high  turnover levels, it sometimes made it very difficult to turn the institution around to the right level.

Mr Hlengwa asked if management was responding positively to the recommendations raised by the audit committee.

Mr Manquku said the audit committee was not satisfied, and therefore he had to say that management was not responding positively to the concerns.

The Chairperson asked what the audit committee was not satisfied about -- was it the lack of response, or the speed of the response?

Mr Manquku said it was the speed that the Committee was concerned about.

Mr Hlengwa asked whether the supply chain management (SCM) was in a healthy state at the entity.

Mr Lamati said the SCM has not been in a healthy state for quite some time within the entity.

Mr Hlengwa said what the DG was saying about the SCM was contradictory to the statement on page 14 of the report.

Mr Lamati said the Mr Hlengwa was referring to the effectiveness of the supply chain.

The Chairperson said the way it had been put was that the structure was there, and the entity’s bible was the National Treasury regulations. However, the question posed by Mr Hlengwa was implying the statement did not go on and evaluate whether they lived by the prescript or not.

Mr Hlengwa said the Chairperson has captured his point correctly. He asked where the consequences for failing to be effective were, because if one was not effective they were bound one way or the other to transgress, and these were catalysts for corruption. There could be supply chain processes, but on the other hand they might not be effective. To shuffle people around would not solve the problem, but simply migrate it. He asked if there was a backlog or not within the entity because the report talked about a backlog whereas earlier on it had been said that there was no backlog in the entity.

The Chairperson asked if the 100 interns had been sourced from a labour programme.

Mr Lamati said the interns had not been sourced from a labour programme. The point that Mr Mafata was raising was that there had been a backlog, and Committee Members would remember that the entity had promised to eradicate the backlog. This was exactly what it had done, although there were some that had outstanding documentation.

The Chairperson asked how many had outstanding documents.

Mr Hlengwa also asked what the turnaround time was.

Mr Mafata said the entity attempted to have a finalised claim within 60 days. The entity was currently working on improving this to a much shorter period. The entity did not currently have the numbers with them of the outstanding claims.

Mr Hlengwa asked if there were any claims that were above average

The Chairperson said what should worry the entity every day should be claims, and if it knew what these numbers were, then it was on top of its game because that was what it was working with -- numbers. He said the entity should do an age analysis.

Mr Hlengwa asked if the entity gave loans to service providers and if so, did these loans get the approval of the Minister or an official authorised by the Minister. If they did, what was the value the loans?

Mr Lamati said it was not loans, but pre-advances that were given to service providers. The logic was that because of the fact that there were backlogs in claims, the service providers would then deduct the amount that was owed to them. The amount was about R464 million, which was also a subject of the investigation by the SIU.

Mr Hlengwa asked if this was in keeping with the PFMA.

Mr Lamati said it was not.

Mr Hlengwa asked if action had been taken against those who had violated the PFMA.

Mr Lamati said at this stage action had not been taken because the R464 million was a subject of the SIU investigation.

Mr Hlengwa said this spoke to a lack of internal control -- the fact that this amount could be R1 million, let alone R464 million. How does this happen? He wholeheartedly agreed that the people responsible were being protected. The absence of consequences had given rise to these violations and the lack of compliance. Had the audit committee raised these issues and if it had, what action had been taken?

Mr Manquku said the audit committee had raised serious concerns and at one point felt that this situation had stopped. However, the committee had continued to monitor and some violations may have taken place again.

Mr Hlengwa said that on page 140 of the report, the money had been called a loan and not a pre-payment, as the DG had said. He asked why were no interest had been charged.

Mr Mafata said there were problems in the way the entity was accounting for revenue and part of this problem was the system’s inability to calculate this interest. This was something that was being worked on.

Mr Hlengwa asked if it was a work in progress – in other words, it had not been corrected.

Mr Mafata said it had not been corrected. The entity was currently involved in a project to enhance the current financial system, and one of the things that had been identified was correcting the levying of interest.

Mr Hlengwa said the reasons for the collapse of the entity were the absence of consequences for the responsible line function persons, and a quiet reshuffle had given rise to this. The audit committee was not being taken seriously. It would be within the Committee's rights to dismiss the report as unreliable altogether. He said people must be held accountable -- they must walk the plank or otherwise this would continue. The DG must assert his authority so that compliance became a norm and not a luxury. It must inculcate the operations of the entity day to day, and the commitments made by the Minister of the quarterly report must be fulfilled to assure the Committee that progress was being made.

Mr Booi said he liked the fact that the DG said he was taking responsibility, because the Department was in a mess because of him. The DG did not take auditing seriously, as this part of the process was not being allocated funds by the DG.

Mr E Kekana (ANC) asked if there was a reason some of commitments from the Minister had not been implemented. What was going to be done by the accounting officer about the people who had been shifted? He said the Committee had to do something about these people.

Ms T Chiloane (ANC) asked what kind of resolution the Committee was going to write to conclude this work. Was this going to be justice done for the public purse, or just as members of SCOPA?

The Chairperson suggested that the entity provide the Committee with detailed information about the investigations that were under way, whether they were internal or external. The entity should provide information and an age analysis on the backlog. There needed to be a breakdown of commitments so that when they were added up, they tallied to R40 million. There should also be a breakdown of contingent liabilities. There needs to be a sense of an internal audit function -- the structure, its composition and its audit plan.

Mr Brauteseth said there should also be a report on all disciplinary matters that were going on at the moment, how many people, including Mr Modiba, were on suspension, how long they had been on suspension and what they had cost the entity so far.

Ms Khunou said there should also be a detailed report on consultants.

Mr Hlengwa said there should be a report from the audit committee on matters it had raised, when it had raised them, the response it had received and when it had received these responses.

Mr Booi said the SIU should come to the Committee with the Public Protector to inform it about what they had done in relation to the issues raised.

Mr Brauteseth asked if the SUI report was out yet.

Mr Lamati said the report was not out yet. He said the requested reports would be ready by 16 March.

The meeting was adjourned.