Marine Living Resources Fund 2006/07 Annual Report

Meeting report

Marine Living Resources Fund (MLRF) 2006/07 Annual Report
Ms Nosipho Jezile (Acting Director General: DEAT) said that the Marine Living Resources Fund was established in terms of Section 10 of the Marine Living Resources Act and it was the main source of funding for operations of DEAT’s Marine and Coastal Management (MCM) branch. The branch had five chief directorates: marine research, marine resource management, an enforcement component, Integrated Coastal Management (ICM) and the Fund’s financial management.

She outlined the achievements within the chief directorates that included the completion of stock estimates and recommendations for eighteen fisheries and two new fishery sectors, the development of a graduate science programme to ensure skills development and publishing draft policies on subsistence and small-scale fisheries. Previously disadvantaged rights holders and Black Economic Empowerment (BEE) compliance was at 59%. Other achievements included drafting and publishing the Integrated Coastal Management Bill for public comment and improving monitoring capacity through the implementation of the new Vessel Monitoring System and the effective deployment of the Environmental Protection Vessels (EPVs).

Regarding the Fund’s finances, a turnaround strategy had been created for the Fund due to the weaknesses that had been identified by the Auditor General. A Draft Cost Recovery Model was developed and accounting policies and internal controls had been changed to ensure compliance with International Compliance Standards and the Public Finance Management Act (PFMA).

The Fund had received a qualified opinion from the Auditor-General for 2006/07 and prior to that, it had been issued with disclaimers by the Auditor-General for 2003/04, 2004/05 and 2005/06 financial years. The Department hoped to move towards an unqualified audit report for 2007/08. The Fund’s turnaround strategy was sure to result in an improved report. Ms Jezile stated that the Department had implemented new systems to govern the Fund. In the previous audit report, there had been twenty qualifications and the AG had decided not to express an opinion. The current Audit Report had five qualifications. Improvement in financial management had led to the clearing of significant disclaimers that related to revenue, debtors and disposal of assets. Special attention would be given to strengthening the financial accounting skills and capacity of the entity.

Qualifications in the Report were given for overstatements in the area of Property, Plants and Equipment, overstatements in supplier reconciliation and questions of accuracy and completeness of opening balances. Two qualifications were given because deferred income completeness was not verified due to the opening balance qualification and there was a deficiency in prior years’ internal controls within the area of government grants.

The Department was working towards an unqualified audit report. Management had formed a Project Steering Committee called “Let’s Fix It” that met weekly and temporary staff had been appointed to assist in sorting out problematic areas. A new Chief Financial Officer, Mr Saliem Mohamed, had been appointed. The asset verification process had commenced and the procedure for disposal of assets was functional. The budget process for the 2008/09 financial year had also been finalised.

Ms Jezile then addressed the matter of the controversial disposal of the “Eagle Star” vessel. She explained that there was now a Disposal Committee in place to deal with this project and other issues concerning depreciating assets.

The Chief Financial Officer, Mr Saliem Mohamed, reminded Members that the MLRF had experienced a deficit of R65 million the previous year. He informed them that there was a R66 million surplus for the 2006/07 financial year. The move from a deficit to a surplus had to do with implementing the correct International Accounting Standards (IAS). The Revenue and Expenditure Budgets were increasing every year, as the National Treasury had made a commitment to the MLRF that they would assist them in terms of lessening the burden on the fishing industry. Mr Mohamed informed Members that the Department’s main concern was assets. Assets were a problem throughout government. The Department was working hard to resolve the problem but that they did not have enough capacity skills in asset control.

Ms Jezile mentioned that the Department was getting more accounting capacity. 

Mr Mayekiso said that Members were probably familiar with the issue of the Eagle Star. It was a vessel that was supposed to be very valuable but it was sold very cheaply. He wanted to give Members more background information to this issue. As far as the Eagle Star was concerned, there were various factors that combined to get an outcome that the Department did not want. The Eagle Star was a fishing vessel that was owned by a company called Hout Bay Fishing that was responsible for a lot of poaching of the south coast rock lobster. When they were apprehended, the vessel was confiscated and became via court order the property of the National Prosecuting Authority (NPA). The Department then agreed with the NPA that the vessel would be transferred to DEAT. The Department paid R5 million for the vessel. The reason the Department wanted the vessel was because they were going to procure four new patrol vessels and they wanted to have the services of a vessel that would train the fishery control officers so that when the new vessels arrived in 2004/05, the officers would know what to do in the open ocean. The intention was to keep the vessel for a short period to train the fishery control officers. The Department would dispose of the vessel once the four new vessels arrived. The vessel was already 23 years at the time and it was considered for the task of training. When the new vessels arrived, it was decided that the Eagle Star would be sold.

Mr Mayekiso felt that it was important to indicate that the decision to sell coincided with a time when there were budget cuts and financial constraints and the vessel was costing the Department R3500 a day even though it was idle. It was decided to sell the vessel, as the Department was under pressure to sell the vessel. It had outlived its usefulness and value to the DEAT since the four new vessels had arrived. Donating the Eagle Star would have been a more viable option that keeping it. The Department tried to donate it to Mozambique but they were not interested. There was little interest in the vessel based on the initial attempts to donate it and then sell it. Unless the prospective buyer had a specific use for it that would generate a revenue stream, the maintenance and cost of the vessel would be crippling. The market for the vessel was extremely narrow, especially after the finalisation of the various fishing rights allocations.

Mr Mayekiso explained the auction that took place. The Department did not manage its own vessels; a shipping company called Smit Amandla Marine managed them. The Department asked Smit Amandla for advice on how to sell the Eagle Star and they advised DEAT to do it via public auction. The Department then asked the shipping company to sell the vessel for them, which they did. Smit Amandla started looking for auction companies and once this was done there was a complaint from an auction house that the process had not been adequately transparent. The Department asked their legal division to give advice on this matter and the legal division said that the process that was followed by Smit Amandla, the managing company, was indeed challengeable. The time that the auction was cancelled was before fishing rights were allocated and the Department thought that with having the auction at that time, there would be rights holders who would be interested in procuring a fishing vessel. It took the Department another five or six months to secure another auction date and by this time fishing rights were already allocated and interest in the vessel was not what it should have been. The auction was held and there were two bidders; one bid for R100 000 and the other bid for R300 000. This was the highest bid that the Department received. He reminded the Committee that there were many factors that contributed to an outcome that the Department did not want. The vessel was 37 years old at the time of the sale, the maintenance costs were very high and it was past its working life. There was fuel in the vessel worth R250 000 and Smit Amandla advised the Department that the vessel should be sold with the fuel. The expectation at the time was that fuel in the vessel would increase the price of the vessel. Unfortunately, this did not happen. In addition, taking the fuel out would also have cost more money.

Ms Jezile stated that the facts were outlined in the Annual Report. The cancellation of the first scheduled auction was in August and the auction was rescheduled for November. The Eagle Star cost the Department a lot of money just to maintain it while it was idle. There was wasteful expenditure that was incurred on the cancellation of the auction. The Director-General approved the appointment of external investigators to investigate if there was corruption in the process of selling the vessel. The report indicated some level of irregularities but nothing that could be materially significant. The report was then sent to National Treasury and they advised the Department to call in forensic investigators. The Department asked them whom to use for the forensic investigation and they were told to approach the Scorpions. The DEAT then wrote to the Scorpions and sent them the reports. The Scorpions later replied saying that PricewaterhouseCoopers had investigated the matter and found nothing irregular. The Scorpions had looked at the matter closely and had decided not to investigate further unless new information was brought forward. The Department informed Treasury that they could not perform further investigations.

Discussion
The Chair asked what the value of the vessel would have been, had they traded it in for another.

Mr Mohamed answered that because of the age of the vessel, the amount that would have been spent on getting the vessel back in to form so that it was usable would have been too much.  The useful life of the vessel had already been used; it had no value.

Mr A Mokoena (ANC) said that he understood the problems that were encountered in disposing of an asset. However, he noted that the Department could have said that they would not accept any bids below a certain amount when the vessel was auctioned. He wanted to know why the Department did not consider this option.

My Mayekiso answered that the Department did not manage the vessels; a shipping company called did. The shipping company advised the Department not to have a reserve price, as a reserve price discouraged people from coming to the auction. At the time, DEAT thought it was the right decision. Also there was no market value for vessels; the market value is what you fetched on the day of the auction.

Mr G Morgan (DA) stated that the MLRF’s situation had improved greatly over the years. He noted that there were some revenues that the Department could easily budget for and there were certain revenues such as income from fines that were harder to budget for. The proceeds from the sale of illegally caught marine species were seen as a perverse incentive to the Department. He suggested that the Department catch the poachers and auction the illegally caught goods thereby creating a revenue stream for themselves. Also, at the end of the day, MCM needed annual cash injections from the Treasury. The Director-General, the Deputy Director-General, the Chief Financial Officer and the Minister had to look at the long-term sustainability of the Fund and the amount needed to protect the coastline. The MLRF had confiscated a fair amount of equipment during the year so there was the possibility of accumulating goods. He asked for the Department’s comments as the equipment could be used to protect the coastline. There were many people who wanted to protect the coastline so surely there was the possibility of increasingly capacitating the honorary fishing officers.

Mr Mayekiso replied that the Department preferred illegally poached species to stay in the water and wanted to avoid selling poached goods. The South African Police Service agreed that it was more important to keep illegally poached fish such as abalone in the water. The DEAT did not want to depend on revenue made from selling poached goods.

Mr Mohamed stated that it would be difficult to predict how much the Department would receive from the sale of confiscated abalone. In terms of cash injections from the Treasury, the Department was in the process of pursuing the Treasury for more money for the next three years. This funding would be used to improve law enforcement in the fishing industry. Mr Mohamed appealed to the Committee to support the Department in their request for more money from Treasury. The Treasury had already transferred R79 million for vessel operating costs, which showed a tangible commitment to finance “public goods”.

Even though they were accumulating equipment, the manner in which the Department and the SAPS worked together to confiscate the equipment needed improvement. There was still no clarity on where the assets would be categorised.

Ms M Ntuli (ANC) stated that the issues encountered in the disposal of the vessel were to be resolved, as it worried the Committee greatly. She did not understand the logic of how the sale was planned. Ms R Ndzanga (ANC) agreed that the Eagle Star issue had to be dealt with.          

Mr Mayekiso informed the Committee that planning for the sale of the vessel had been done long before but it was not planned properly due to the increased cost of maintaining the vessel. The increase in cost was not anticipated with accuracy. Ms Jezile added that if the Department were to have kept the vessel then they would have to declare the wasteful expenditure on maintenance. 

Ms J Chalmers (ANC) wanted to know how much it would cost to protect the coastline appropriately and how the government could maximise the importance of the coastline. She suggested that the Department award those that live on the coast the title of honorary fishing officers. Ms Chalmers also asked for more information on tuna, as the country’s fishermen did not have the capacity to catch tuna and foreign fisheries would be fishing in South African waters.

Mr Mayekiso stated that the Department had not conducted a study to see how much it would cost to protect the coastline, as it was not easy to arrive at a figure. The Department had to work from the basis of what they had. The DEAT completed a study on the value of the fishery but they needed to look at the value of protecting it.

Mr Mayekiso suggested that the government employ a rebuilding strategy with resources, as the Department wanted to see recoveries. DEAT had discovered that managing single species was the wrong approach, as animals did not exist in isolation; they live in an environment. The Department would move towards working with a whole eco-system.

There were about one hundred honorary fishery control officers. The DEAT favoured this concept but warned that it could be dangerous to give members of the public a certain amount of power.

Mr Mayekiso stated that there was no foreign fishing in South Africa’s waters, except as joint ventures.

Mr Andre Share (Chief Director: Marine Resource Management) said that quotas were negotiated within international waters but there was not enough technical know-how within South Africa. Currently in the country, there were eight fishing vessels from Japan, two from the Philippines and three from Korea. These foreign vessels entered into joint ventures with South African rights holders. Additional tuna and swordfish rights would be allocated by the end of September.

The Chair asked for the Department’s comments on the transformation of the fishing industry. He noted that there were huge problems with fishing quotas, fronting and labour law violations. He asked if the Department would consider having an indaba with the poachers with the objective of transferring them in to programmes where they would be part of abalone fishing.

Mr Mayekiso stated that the question on transformation and fronting was difficult to answer. He saw fronting as falling into two categories. The first category was where people pretended to be something that they were not and the other type of fronting is where one looked like he/she was a legitimate director of a company. Allocations that were made in 2005 went a long way in establishing where the beneficiaries’ interests were. Auditors signed off on the information that was given by beneficiaries and told the MLRF whether the information was correct or incorrect. The Department then checked whether the beneficiaries were doing what they said they were going to do.  

My Mayekiso said that a core management arrangement with poachers was considered but since fisheries were closed at this point in time, it could not be done. There were only 219 inspectors nationally. He admitted that the inspectors had to be more visible in other provinces like Eastern Cape and Kwazulu-Natal. Kwazulu-Natal had the capacity to enforce regulations but that they needed to manage the regulations better.  

Mr Mokoena wondered about the 59% BEE compliance. He suggested that the figure be unpacked as there was a lot of fronting happening. It was important to see how many of the beneficiaries actually complied so that fronting could be exposed.

Mr Mayekiso stated that the figures varied so the Department took the average of all the figures and arrived at 59%. He agreed that the figure needed to be looked at more closely, as 59% was not a general amount in the fishing industry. 
 
The meeting was adjourned