ARC, OBP, NAMC, PPECB 2016/17 Annual Report

Meeting report

The Chairperson opened the meeting by welcoming all attendees and said that this meeting was a continuation of the session the Committee had the previous day with the Department of Agriculture, Forestry and Fisheries (DAFF). 

Agricultural Research Council: Annual Report

Dr Shadrack Moephuli, Chief Executive Officer (CEO) informed the Committee that a new Board had recently been installed, and that some members were present. He introduced the new Chairperson, Professor Sibusiso Vil-Nkomo, and Dr Joyce Chitja, Mr Allan Bishop, Ms Joyce Mashiteng and Mr Andrew Makenete. 

He highlighted some of the key ARC contributions to governments national priorities, such as job creation, food and nutrition security, improved food productivity and how this linked in with the ARC’s strategic goals, as some programmes were involved in crop production, improvement and protection, animal health, production and improvement, small agricultural development and natural resource management.

There were six ARC strategic goals that contributed to the country’s growth and development imperatives in line with the National Development Plan (NDP). These were:

• To generate knowledge and technologies that would enhance efficiencies in crop based agriculture. Some of the outcomes in this goal were new cultivars that would ensure higher profitability (e.g. breeding of blushed pears suitable for warmer climates), new drought tolerant and insect protected maize hybrids (e.g. these maize hybrids were found to be resistant to the invasion of fall army worm), and production guidelines for small grain production in both summer and winter rainfall areas in English, Afrikaans, Zulu, Xhosa and Sotho.
• To generate knowledge and technologies that would enhance efficiencies in livestock-based agriculture, for example, research and production of vaccines marketed by Onderstepoort Biological Products (OBP) against soft and hard ticks that transmit diseases. The vaccine against heartwater, which causes ahigh mortality rate in goats, sheep and cattle of up to 90%, would be marketed soon. Another important ARC programme was Kaonafatso ya Dikgomo (KyD), which was aimed at accelerating the participation of smallholder producers into the mainstream livestock industries.
• To generate knowledge and technologies for the conservation and utilisation of natural resources by enabling agriculture to be resilient to climate change. Some of those programmes were to enable the early maturing of some fruit varieties to escape heat and drought, and breeding for higher temperature optimisation. This had been particularly useful to some apple cultivars, where the milder winters impacted fruit production negatively.
• To generate knowledge, solutions and technologies for food safety, quality and improved efficiencies in the agricultural value chain. Some outcomes in this goal were the provision of scientific services to farmers and clients of the ARC, the development of processes to create products from indigenous crops, and programmes that reduced post-harvest losses. 
• To translate research outputs in order to generate knowledge, facilitate decision-making that contributed to the transformation of the agricultural sector. Some examples showcasing the impact of ARC contributions to agriculture were the ARC cultivars used for 45% of nectarine exports, and 16 of the top 39 plum cultivars exported from SA are from ARC. In addition, there had been a substantial investment in smallholder agricultural development, with more that than 9 577 scientific services rendered to smallholder farmers, and 5 474 smallholder farmers trained. Infrastructure investment, like dip tanks and crush pens had been revitalised and had improved smallholder farmers’ incomes. 
• To apply resource management practices towards a high-performing organisation, mainly around more effective and efficient human resource and infrastructure management within the ARC. Some highlights were in capacity building --130 employees were on PhD programmes and 66 on Masters programmes. Important information communication technology (ICT) platforms in use to enhance the roll out of ARC programmes were Agromet - a tool used for long-term graphical comparative weather data used by the Institute for Soil Climate and Water, and GRIN, a facility used by the Small Grains Institute, holding information from genebanks which enabled an efficient global network of specific plant information that safeguards plant genetics and food security.

 Mr Gabriel Malulekwe briefed the Committee on the ARC’s financial information for the period 2016-17, which contained three key findings.

After receiving unqualified audits for nine years in a row, the ARC had regressed in 2016-17 to a qualified audit. The office of the Auditor General (AG) had raised some concerns in the 2015-16 financial statements, culminating in the current period’s qualified audit. This was mainly due to the quality of financial statements submitted, irregular expenditure, misstatements of financial information and systems limitations.

Technically the ARC was insolvent in that for both 2016 and 2017 it had operated with a deficit. In 2016 the deficit was R68m, while in 2017 the deficit was R86m due to the lower grants it had received from Parliament. The chief financial officer (CFO) had indicated that if there was not sufficient cash injection into the ARC over the next two years, it would not meet its mandates, the bulk of which involved research services (about 84% of received income). In addition, the income grant from Parliament was not enough to cover staffing costs. 

A disturbing contributing factor to ARC’s qualified audit was the non-payment for agreed work by three government departments who collectively owed the ARC R126m. The DAFF owed R42m, the Department of Rural Development and Land Reform (DRDLR) owed R30m, and the Department of Environment (DEA) owed R54m. Negotiations were still ongoing to recoup the outstanding amounts.

ARC had agreed on remedial actions with the Auditor General of SA (AGSA) to improve its audit outcomes. This included a detailed plan to redress the negative aspects of the 2016-17 audit and to eliminate root causes by 31 December 2017.

Discussion
Ms A Steyn (DA) said the ARC’s report was not good reading material, but the Committee had been aware of this. There was great concern for the financial health of ARC, and she was worried about how it would impact things on the ground. She highlighted the following issues:

She wanted to know many farmers were on the fall army worm (FAW) and drought resistant maize programme, and how it had influenced this sector.
She congratulated the ARC on the development of the new 5 in 1 vaccine (one inoculation for five diseases instead of the usual 1:1 ratio)
What was the progress on the heartwater vaccine?
How close was the ARC to finding a remedy for the viral bunchy top disease that affected bananas? 
A general concern was the capacity of the ARC, given its dire financial constraints, to help with diseases like avian flu, etc.
She expressed her disappointment with the ARC’s financials, especially the impact of the unpaid DAFF and DRDLR invoices. She wanted to know how this was possible, and what was being done to get the money. 
What other plans did the ARC have to manage its business with the lower grant income, rather than just asking Parliament for more money?

Mr P Maloyi (ANC) expressed concern over the absence of both the Minister and his deputy. The situation at ARC was quite depressing, and he felt it was critical that the Minister and his deputy were present to inform the Committee on what its plans were for the ARC - to keep it as a going concern or to discontinue. If it was the former, then ARC needed more resources. Hr also wanted to know how the exotic diseases facility was progressing. Regarding the audit outcomes, he asked what the difference was between these audit improvement plans versus the plans that had been implemented in the past, and whether they would work. Why had the audit been outsourced to a third party and not done in-house? Had it been made aware of the accounting and audit weaknesses? Why had the chief audit executive resigned? 

Mr P van Dalen (DA) wanted more clarity on a litigation case for which the ARC had earmarked R42m. He expressed concern on how it was possible for the entity to spend more money than it had received, and asked if this over-expenditure was funded with loans or interest. A further concern was that during these hard times, the ARC had to take “hard” decisions that were in the best interest of the company. For example, were any salary increases paid to workers, and if there were, what was the increase? He also wanted to know if there was any fraud related to the 2016-17 audit findings.

Mr W Maphanga (ANC) wanted to know what the irregular expenditure was and if this had been monitored within the ARC.

The Chairperson indicated that AGSA had said that ARC was in danger of owing its clean audit status in the previous financial year. This has now come true, so it seemed that accountability and management was a key contributing issue. Last year the Committee was advised of plans to address the concerns raised by AGSA, now there are more plans? - in this regard she posed a direct question to the Chairman of the Board and wanted to know why the Minister had appointed him to the board as the institution had deteriorated in his hands. She wanted to know if he thought the Minister had done the right thing by appointing him. She also wanted to know if the ICT problems had been resolved as indicated in the past.

ARC Response

Dr Moephuli said the report on the number of farmers receiving assistance with the drought resistant maize and FAW resistant hybrids would be made available to the Committee. 

Regarding heartwater, the vaccine clinical trials had been completed. It now needed to be registered with the Medicines Control Board, and ARC had no control over the timelines there.

The bunchy top disease affected only certain strains of bananas -- only the cavendish variety was impacted, and plantains were not affected. This disease was prevalent in East Africa and some ARC researchers were working with their counterparts in Uganda to address the problem locally. 

The CEO pointed out that ARC was responsible for all remedial actions and counter measures against the avian flu outbreak. Despite capacity constraints the issue was being aggressively pursued, including extended shift work in some instances. The remedial action included additional scientific support during the outbreak, managing the culling process (e.g. clean-up and what chemicals to use), advice to the DAFF on the next steps to manage the outbreak. These included better management of poultry facilities, such as sanitisation and no exposure of poultry stocks to wild birds.

The unrecovered monies from DAFF related to work done on biological control of alien and invasive plants. Invoices had not been honoured and the AG had raised doubts about the success of recovering these amounts from the DAFF. This was most unfortunate, as these were invoices had been approved by DAFF, and the ARC was working closely with the DAFF to recoup the outstanding amounts. Similarly, the outstanding amounts with the DRDLR and the DEA were for approved work that these government departments were tardy to honour.

The Board, ARC’s audit committee and management were exploring various options to minimise costs. These included getting rid of unwanted assets, sharing equipment within different projects and deriving rental income from some ARC facilities.

Regarding the senior audit executive who had left, the CEO said he had resigned because he had received a job offer in the private sector at twice his current salary.

The ARC internal audit process was outsourced, as it was not a key skill requirement for the ARC. However, the entire process was overseen and managed by a senior manager to ensure there was alignment and that the audit outcomes were communicated timeously within the organisation so that corrective action could be taken where necessary.

Regarding the forensic investigation, the CEO said that the ARC did not tolerate fraud, and those who committed fraud were dismissed. There had been one case of fuel card abuse, and the person had been dismissed after investigation. In another case of an ARC staff member colluding with service providers, that had also led to dismissal, and the tender had subsequently been withdrawn

The exotic disease facility that monitored amongst foot and mouth disease and others, had to be shutdown in 2005 due to ageing contamination of the infrastructure. A conditional grant of R180m had been received for refurbishment to develop the new technology that would be used to combat exotic diseases, to build capacity within the ARC to run the new facility (with eight individuals trained), and to develop the process plant through a pilot phase to give an indication of upscaling the process from the laboratory to full production. A tender had subsequently been issued for the design and contraction of the new facility, but there was a R400m shortfall in funds. The ARC was still in the process of engaging the DAFF and National Treasury (NT) for additional funds.

Mr Gabriel Maluleke, CFO: ARC, said that the main difference between the current plan to address the AGSA audit outcomes in this report was that it contained substantially more detail and went into greater depths to address the shortcomings identified.

The CEO advised the Committee that the litigation was for a dispute with the City of Tshwane regarding incorrect electricity meter readings. A bill of R29m had been received, which was most unusual. As a contingency, the ARC had had to accrue it as such, as the matter had gone to court.

The average increase to all employees across the board was around 5%, which was implemented with the aid of Commission for Conciliation, Mediation and Arbitration (CCMA) arbitration. Due to the perilous state of its financial position, no perforce bonuses were paid to those who qualified. This was despite signed agreements with staff members as part of their remuneration packages. Staff members had accepted this.

Ms Makgomo Umlaw, Group Executive for Human Resources and Legal Services: ARC, informed the Committee that one of the ARC senior executives had taken the entity to court for non-renewal of employment. The issue was continuing in the high court.

Professor Sibusiso Vil-Nkomo responded to the direct question of the Committee Chairperson on his appointment as Chairman of the Board amidst the poor performance of the ARC. He believed the Minister had applied his mind in appointing him. The Board was professionally run and well resourced. The current woes of the entity were due to severe budget cuts. This had been a turbulent year for the ARC, which was a strategic and major government asset, but without adequate funding it would not be able to deliver on its mandates. All parties -- the ARC, the DAFF and the DRDLR -- had to work together to find a resolution to the current problems.

The CEO resumed his response by indicating that the Enterprise Resource Planning (ERP) system was vital to the entity, and that the service provider was currently trouble-shooting the system to ensure it functioned optimally. All staff had been retrained on the system.

The Committee Chairperson closed the discussion by indicating that the ARC had to use the limited resources it had more optimally. It had to manage its affairs properly, otherwise it would weaken its case when requesting additional funding from the NT. She said an improvement plan was urgently needed and requested the DAFF Director General (DG) to ensure this was in place. She also suggested more frequent interaction with the AGSA on improvement issues so that corrective actions were implemented early. 

Onderstepoort Biological Products (OBP): Annual Report

Dr Bethuel Nthangeni, Acting CEO: OBP, advised the Committee that a new Board had recently been installed. Mr Ronald Ramabulana was the new Chairman of the Board, and attending the meeting with him were some other board members - Dr Pieter Vervoort, Dr Charlotte Nkuna and Ms Fulufhelo Mphuthi.

Dr Nthangeni said some of successes achieved by OBP in 2016-17 included an unqualified audit, South Africa’s recognition as a leader in the manufacture of livestock vaccines, and the implementation of a new distribution network.
 
Some of the other notable highlights aligned to its strategies goals were:

Achievement of more than R24m above the targeted sales revenue of R145m;
Maintenance of International Organisation for Standardisation (ISO) accreditation;
Sustained growth in export markets;
Increased support for smallholder and emerging farmers.

However, in some areas there were some shortfalls against set targets. There had been a delay in the implementation of the Good Manufacturing Practice (GMP) compliant facility, some customer and stakeholder relations targets were not achieved, and there had been lower than expected vaccine sales to government departments in provinces.

Matsobane Gololo, CFO: OBP, briefed the Committee on the organisation’s financial performance, and highlighted:

The unqualified audit report for 2016-17.
The sustained increase in revenue since 2014-15 (R87m) to 2016-17 (R174m), which had been driven mainly by growth in the international market, especially Europe.
Increased profits -- from a low of a R9m loss in 2014-15, to a R48m profit in 2016-17.
Total assets were now at R745m, against liabilities of R561m. The amount for the GMP upgrade had been ring fenced.

 Discussion

The Chairperson congratulated OBP on its unqualified audit, but said it should not rest on its laurels as the audit was not entirely clean.

Mr Maloyi (ANC) said that in 2013-14, about R490m had been transferred to OBP for the modernisation of its facilities. He wanted to know if the facilities had been modernised and if not, what other construction upgrades had taken place. Did OBP have any plans to ensure the decline in local sales was reversed and that the entity remained competitive? He wanted more information on the forex losses of around R10.3m, and the bad debts of R3m that were contained in the written annual report sent to Committee Members. As the AGSA had said there were some problems with internal controls in OBP, was the audit committee fully functional and overseeing all audit processes? If not, were there plans to correct this as it would not be good for OBP to regress?

Mr L Ntshayisa (AIC) wanted clarity on the roles of OBP and the ARC to ensure they were not duplicating activities. He also wanted to know if there were any disabled people employed by OBP. 

Ms Steyn congratulated OGP on its unqualified audit and urged it not to regress. She asked for more clarity on what the risks were if OBP was not GMP compliant, as non-compliance would surely impact negatively on sales. She wanted to know what the plans to become GMP compliant were. Had the initial problems associated with the distribution channels been resolved? Were all vaccines in production, or were there some that could not be produced, and what were the time lines for vaccine production? How many of the targeted 260 batches of vaccines had been produced?

Mr Van Dalen wanted to know what OBP was doing to address some of the concerns raised by the AGSA audit, such as that the leadership did not provide effective oversight in the preparation of the audit statement, and there were also material misstatements. This had to be addressed by the CFO. He wanted to know if the CFO was qualified enough for the job.

The Chairperson said that the OBP was a candidate for a qualified audit, and it had to convince the Committee that it would not regress. 

Mr Maphanga commented that there were not enough females in OBP, and that males were dominating.

OBP’s Response

Dr Nthangeni referred to vaccine production, saying there was a four to six year timeline from it being discovered by ARC to reaching the customer. This was because it typically took two to three years to upscale production from laboratory trials to full scale production. Batched products must then be kept for up to two years to ensure they meet the one to two year product stability requirement. Once all these milestones were met, the product was submitted to the Registrar and the waiting period for registration could be up to two years.

The R490m from NT for the upgrading of facilities was on track. R130m had already been spent on some upgrades, and an amount of R360m had been ring fenced and earmarked for the new GMP facility. He asked Mr Ntomebla to provide more detail on the GMP project.

Mr Ntombela said that the layout for the new facility had been scrutinised by GMP experts. and the tender had been issued for the new equipment. Some parts of the old facility had to be demolished and this would affect current production, so careful planning was required to ensure that this minimised the impact on production levels. This would coincide with the annual shutdown of the facility from December to January. Current estimates were that OBP would be GMP compliant by the second quarter of2020.

Mr Gololo briefed the Committee on the queries raised on bad debt and forex losses. The R3m bad debt was not actually bad debt. Most of it was owed by European Union (EU) customers, and R2m had been paid off, but this had been paid after the audit was completed. The R10m forex losses was due to US$ and Euro denominated currencies kept by OBP for trade with international partners. There would be losses or gains as the value of the Rand fluctuated.

He also explained the material misstatements related to disclosure of debt being lumped with accounts payable had been an accounting interpretation which had cost OBP a clean audit. Basically OBP had included R5m of debt as part of R20m accounts payable. The interpretation by AGSA was that the R20m had to be restated as R15m accounts payable, and R5m as debt outstanding. 

Dr Nthangeni said that OBP employed three disabled people. On the issue of males dominating, he said that management was aware of this and that there were always adjustments to bring things on to an even keel by appointing more females when vacancies needed to be filled.

Dr Nthangeni explained the difference between the ARC and OBP. ARC provided the pipeline of new products, like candidate vaccines that may eventually end up as products. OBP’s main focus was product development, taking concepts developed at ARC and using process improvements and cost efficiencies to produce fully fledged products. 

Regarding the lower local sales, he said OBP was aware of this, and part of the problem was the move in the market from monovalent vaccines (one injection, one dose for one disease) to multivalent vaccines (one injection, many doses for various diseases). OBP was currently researching the latter to improve its customer offer.

Dr Jacob Modumo: Business Development Officer, expanded more on this by saying that although OBP experienced some challenges in the domestic market, it had grown the business to be in the top 10 for animal health products.

The Committee chairperson left the meeting, and Mr Maloyi took up the position as Acting Chairperson.

National Agricultural Marketing Council (NAMC): Annual Report

Prof Phineas Chauke, Board Chairperson: NAMC said a new Board had recently been appointed, and introduced two of his fellow board members, Prof Diale Rangaka and Mr Zandisile Wapi and some of the senior NAMC management present -- Mr Zama Xalisa, Acting CEO, and Ms Sarah Neftili, the CFO. He indicated that a permanent CEO would be appointed by the end of November 2017.

Mr Xalisa said that NAMC had received a clean audit for 2016-17, as had been the case the previous year, and that its activities were guided by the Marketing of Agricultural Products Act that had come into effect in 1996 and started the process of oversight over all the former control boards and trusts established under the previous government, such as the maize trust, wool trust, citrus industry trust, etc, with assets totalling over R1.7bn, to ensure alignment with government priorities like transformation.

NAMC had an oversight role on the levy income received from contributing agricultural sectors – which was about 63% of local agricultural production -- and had to ensure that the income was spent in the following manner:

• 70% on information, promotion, research and quality control;
• 20% on transformation;
• not more than 10% on administration costs.
• In 2016, the levy income was about R490m.

Some of the successful NAMC programmes that had benefited the agricultural industry were:

• Support for non-commercial maize farmers, which in 2017 accounted for about 12% of planted areas and 4% of the harvest.
• Custom feeding programmes. This was one of NAMC’s development schemes and encouraged small scale farmers to use the feedlots and feeding programmes. This resulted in increased income generated from sales at animal auctions -- R23m in 2016 and R33m in 2017.
• Capacity-building programmes aimed at management, financial and agribusiness training for emerging entrepreneurs and woman in agriculture.
• Agricultural research outputs like the SA food cost review, and SA grains and oilseeds supply/demand estimates report.
• The successful launch of the Y-Agriculture Model aimed at youth.

Ms Neftili briefed the Committee on the some important aspects of NAMC’s financial information.

There had been a clean audit on both the financials and annual report on predetermined objectives for both 2015-16 and 2016-17. There was no fruitless or wasteful expenditure, and a small deficit of R61 000 for 2016-17 year. An additional budget had been submitted after a review of operational activities. Detailed proposals had been forwarded to DAFF and NT for additional funding of R57.3m in 2018-19, R62m in 2019-20 and R67.6m in 2020-21.

Discussion

Mr Maphanga congratulated NAMC on its clean audit, but wanted more clarity on what was being done to entice non-commercial farmers to become commercial, and what the impact of the Y-Agriculture Model had been.

Mr Ntshayisa wanted to know who got performance bonuses.

Ms Steyn asked if it was possible to get more information on transformation within the sectors for instance, maize vs. red meat, and those with levies and those without, such as trusts. Was this sort of information available to NAMC?
 
The Acting Chairperson said that on 18 November 2017, NAMC was scheduled to give a briefing on trusts and transformation to the Committee. He also asked why the poultry industry had opted out of statutory measures in respect of levy collection.

NAMC’s Response

Mr Xalisa said that NAMC was working very hard with a variety of stakeholders to fast-track the movement of non-commercial farmers to commercial farming. This included working with provinces and municipalities to partner and match funds from the 20% levy for transformation spend.

The Y-Agriculture Model was still in its infancy, and it was too soon to see tangible results.

Bonuses had been paid across the board to all who qualified.

The reason why the poultry industry had opted out of the levy scheme was because there had not been full agreement amongst its members. 

Perishable Products Export Control Board (PPECB): Annual Report
Mr Angelo Petersen, Board Chairperson: PPECB, introduced his fellow Board members, Dr Mono Mashaba and Ms Jill Atwood-Palm, and Mr Lucien Jansen: CEO, and Mr Johan Schwiebus:CFO. presented the PPECB Annual Report

Mr Jansen led the PPECB presentation, concentrating on its key strategic programmes - support services, operational services, food and safety services, plus transformation and development. He highlighted the following:

Major fruit export markets remain with the EU (36%), UK (15%), Middle East (15%) and Asia (18%).
SA remained the second largest citrus exporter, and the EU the biggest customer.
53% of grapes were exported to Europe.
The Far East was set to become an important market for avodacos.
There had been a reduction in grain and maize volumes due to drought, but 2017 volumes expected to be higher than 2016.
PPEECB had maintained its ISO 17025 accreditation.

Mr Schwiebus led the presentation on PPECB’s financials, touching on the following important aspects:

• Total income for the year was R298m and expenses were contained at R297m.
• Net assets were R87m and liabilities R32m.
• 62% of goods and services were sourced from broad-based black economic empowered (BB-BEE) measured suppliers.
• 0.06% of expenses were categorised as fruitless and wasteful.

Mr Jansen concluded the presentation by saying that PPECB had been awarded a clean audit for five consecutive years by the South African Institute of Chartered Accountants 

Discussion
 
Mr Ntshayisa wanted to know if the vacancies in PPECB were deliberate or due to no qualified people being available.

Mr Maphanga asked if any new markets were being explored for fruit exports. He also wanted more clarity on vessel inspections and what happened to vessels that were penalised for not being clean during inspections.

The Chairperson congratulated the Board and the Executive team for the good work they were doing and the consistent clean audit. She wanted to know if the PPECB was participating in the Phakisa project to unblock port congestion.

PPECB Response

Mr Jansen said that they were looking at other markets, especially the east, such as the Phillipines. 

Dr Mashaba said that other markets being looked at were China, South Korea for grapes, Japan (avocados), India, Thailand and Vietnam. They were working with the DAFF to explore these options.

Mr Jansen sid that once ships were inspected for transporting cargos and found to be dirty, they were given an opportunity to clean up, but all costs -- cleaning, inspection fees and demurrage -- were for their account, not the PPECB.

He said that they were participating in the Phakisa project to unblock ports. 

Mr Mooketsa Ramasodi, Acting DG: DAFF, responding on all the presentations, said that the financial viability of ARC was vital and that they were engaging NT to get additional funding. He thanked the Committee for its guidance and co-operation and the role it played in ensuring the smooth running of DAFF and its entities. 

The Chairperson concluded the meeting by appealing to entities to work together with the Committee and to interact with it on a quarterly basis, rather than annually, so that all issues could be discussed, including the good work being done, rather than just meet in circumstances like this to engage on problem areas.

She commented that “SA Airways must not come to this Committee,” implying that the ARC must not go in the troubled airline’s direction in terms of its funding requirements. 

She concluded by quoting from a letter received from a citizen, who wanted to know what Parliament was doing to protect citizens from escalating food prices. Leading on from there, she wanted to know what the Committee, the DAFF and its entities could do to strengthen the capacity of the state to ensure food security for its citizens.

The meeting was adjourned.