ANNUAL REPORT 2011 – PRESENTATION TO PCHET, 12 OCT 2011 National Student Financial Aid Scheme ANNUAL REPORT 2011 – PRESENTATION TO PCHET, 12 OCT 2011

Overview NSFAS Annual Report 2011 Chairperson’s Report Board Report Board Committee Reports Annual Financial Statements Annual Performance Report Way forward - 2012 2011

Chairperson’s report 2010 was a challenging year for NSFAS Auditor-General issued Disclaimer of Opinion Board members resigned New members were appointed with a mandate to: Develop and implement a turnaround strategy Maintain NSFAS functions while implementing turnaround Address 2010 Disclaimer of Opinion by the Auditor-General Achieved an unqualified audit in 2011 2011

Board Report - background & governance NSFAS is a public entity which has 7 functions: to develop criteria and conditions for the granting of loans and bursaries to eligible students in consultation with the Minister to raise funds to allocate funds for loans and bursaries to eligible students to recover loans to maintain and analyse a database and undertake research for the better utilisation of financial resources to advise the Minister on matters relating to student financial aid to perform other functions assigned to it by the NSFAS Act (56 0f 1999) or by the Minister 2011

Board – composition & committees Board - 13 appointed members, 4 co-opted Executive, Finance Committees October 2010 - Minister assessed board performance and identified challenges December 2010 – 5 resigned, 6 remained, 3 co-opted 2011 – DHET completed process to fill 8 vacancies 2011

Board Report – management Chief Executive Officer Jan 2011 – probation extended Feb 2011 – suspended April 2011 – employment not confirmed after probation, contract terminated Executive, senior management Number of vacancies – being filled in 2011 Capacity challenges 2011

Executive Committee Executive Committee (Exco) Board chairperson - Zamayedwa Sogayise DHET representative - Shai Makgoba 3 other members Exco functions determined by the board in terms of s10 of NSFAS Act: To develop and implement a turnaround strategy conduct a due diligence of the entity, its risks, commitments and resourcing needs 2011

Audit & Risk Committee Chairperson – Stephen Smith Auditor-General Report (p45) NSFAS moved from the Audit Disclaimer of 2010 to an Unqualified Audit in 2011 AG concurred on involvement of board in turnaround “Although this might have increased the risk of loss of independence of the Audit Committee, the interventions were sound…” - AG Management Letter, 2011 2011

From disclaimer to unqualified audit - background In 2010 the A-G disclaimed an opinion on 5 grounds: NSFAS did not value the loan book at “Fair value at initial recognition” in terms of IAS 39 did not correctly account for interest over the life of the loan in terms of GRAP 9; only started accruing for interest on repayment was unable to justify on verifiable scientific grounds how we impaired the debtors. In addition, NSFAS wrote off R589m of interest and could not properly justify this 2011

From disclaimer to unqualified audit – background (cont) Interest was incorrectly calculated on the system by R181m due to adjustments made without proper control There was a reconciling difference of R42m which could not be explained For these reasons the auditors had doubts about the accuracy of student loan balances in LMS. They had sufficient doubt about the valuation of the loan book for them to disclaim an audit opinion. 2011

2011 year end interventions To address the 2010 audit disclaimer, a number of key interventions were implemented: Reconstituted Board, Executive Committee Changing gear from 3 year to 1 year compliance CEO contract terminated Secondment of resources to Finance Department Actuarial valuation of loan book Completion of loan book amortisation Independent data verification of loan book Procurement review 2011

Actuarial valuation of loan book We ran every transaction in the loan book to properly allocate all repayments, taking into account the in duplum rule this was the first time NSFAS had ever had accurate data at an individual loan level; Involved: over 180 million lines of transactions approximately 810 000 debtors and 1,6 million loans The model took 5 days to run; 2011

Actuarial valuation (cont) Actuaries ran the data through a model which accounted for all the reasons for differences in loan values Throughout the process we ensured that our auditors and their own actuaries were part of the process Credit balances totalling R77,8m came to light for the first time ever Refunding 34 000 students who overpaid Full provision made for this in 2011 2011

Audit findings Board did not exercise adequate oversight Appointment of service providers too late Technical aspects not started timeously, resulted in actuarial errors that needed to be corrected (misstatements) SCM failure resulting in irregular expenditure Management Accounting Officer did not take steps to address irregular expenditure No proper guidance, training to staff on SCM Human resource vacancies (15% to 18%) 2011

Irregular expenditure – R25,6m in 2010 Opening balance R25 348 SABC 6 083 Vincent House Lease 1 296 Systems Link Cape (Pty) Ltd 2 726 Business Connexion (Pty) Ltd 2 101 *Lithotec Afric Mail Cape (Pty) Ltd 1 664 *Metrofile (Pty) Ltd 982 *Rennies Travel (Pty) Ltd 1 791 *SA Post Office 3 163 Other irregular expenditure 7 019 Less: amounts condoned ( 1 186) Total 50 987 * Suppliers not rotated 2011

Irregular expenditure - remedial procedures Disciplinary hearings of all management involved in procurement process underway Independent adjudication Appointment of SCM officer Automation of purchase order system Condonation of valid expenditure Audit of potential fruitless and wasteful expenditure 2011

Information technology No Chief Information Officer No formal IT governance No formal IT project or risk management framework No formally approved Disaster Recovery and Business Continuity Planning Remedial action - policies, plans, resourcing as part of turnaround 2011

Investigations Forensic audit completed into conduct of one employee Misrepresentation to third parties Employee suspended Disciplinary hearing 19,20 October 2011 No financial harm to NSFAS 2011

Annual Financial Statements The Annual Financial Statements (p45) show in detail what NSFAS does and how it fulfils its mandate Some highlights are: In 2010, NSFAS distributed financial aid of R3.7 billion to 210 576 students - 17% more than 2009 Since NSFAS started, R19 bn disbursed - in 2011, R5,5 bn will be distributed in loans and bursaries Students who pass get 40% of loan converted to bursary - cost R1.85 bn last year, 15% of loan book 2011

AFS -Balance Sheet (p60) Investments and bank R791 m (Inv R541m, Cash R213m, Inv current R37m) Prepayments R298 m Student loans R5,03 bn (Current R421m, Non current R4614m) - (LMS R12,2bn) Fixed assets R12.8 m (PPE R8,6m; Intangibles R4,2m) Payables R53,2 m Credit balances due to debtors R77,8m 2011

Expenditure Operational expenses were R57 million Salaries R23.8 m – 41,5% Audit = R6.3 m – 11% Communications = R6,4 m Rent = R930k Metrofile = R952 k Recruitment = R1,7 m Postage = R2,8 m Stationery = R1,7 m Phone = R1 m 2011

AFS – Why doesn’t NSFAS recover what it lends? Monthly statement run is around R12,2 bn This balance sheet reflects R5,2 bn From books to balance sheet there is a difference of R7bn In 2011, for the first time ever, NSFAS can substantiate this figure to A-G’s satisfaction NSFAS is good at administering outstanding loans charged R536 m in interest last year But is not good at recovering loans LMS R12,2 bn but only recovered R638 m – 5% 2011

Reasons for loan decreases 1 We don’t know IF the debtor will pay Over 20 years there is a pattern of how many do start paying – below earnings threshold, we don’t find them, informal employment 2 We don’t know WHEN the debtor will pay It depends on when they exit, if they find employment, what their level of earnings is and whether we can keep track of them 3 Time Value of Money If we loan R10 000 now and only receive it back in 3 years’ time, the real value in today’s terms is not R10 000 2011

Reasons for loan decreases (cont) Differential interest rates We only charge 80% of repo as interest (currently 4.4%) but discount to present value at 8.5%. The difference between these two interest rates reduces the value if the loan; also limited by “in duplum” rule Death and disability We factor in actuarial estimates re death and disability Bursary conversion We write off of up to 40% depending on student’s academic success The cut off point is 10 years If debtors haven’t started paying within 10 years we fully impair the loan 2011

Finance Committee Finance Committee Chairperson – Nathan Johnstone Functions Advises the board on the financial management of NSFAS, including: Raising funds Loan recovery Investment of repayments Monitors and reports on performance quarterly, annually 2011

Annual Performance Report (p23) Strategic Goals Expanding the pool of funds available for disbursement as student loans and bursaries 2 Effectively managing the institutional utilisation of funds administered 3 Strengthening internal efficiencies in the processing of student awards/claims to ensure that funding reaches target population 2011

Strategic Goals (cont) Strengthening the quality of internal management and operations inline with changing funding patterns Effectively communicating the relationship with all NSFAS stakeholder groups and targeted audiences 6 Undertaking research that informs the effective utilisation of available funds and serves to advise the Minister of matters related to student financial aid 2011

Way forward Comprehensive policies and plans are being developed to improve operational efficiency and lay the foundation for a smooth transition to new, student-centred systems: IT infrastructure, systems and operations, including acquisition and implementation of a new Loan Management System Loans and bursaries administration Finance Credit Management, including debt recovery Audit and risk management HR management Communications 2011