2015/2016 ANNUAL REPORT OF THE DEPARTMENT OF COOPERATIVE OVERNANCE SCOPA REVIEW: PUBLIC HEARING MR KTM SIGIDI 16 November 2016

Introduction Mandate of the Department Programmes of the Department 2015/16 Audit Outcome Irregular, Unauthorised and Fruitless and Wasteful expenditure Irregular Expenditure Key Findings and Actions Implemented Investigation Reports Conclusion

INTRODUCTION The Department received an invite from the Chair to appear before SCOPA The appearance was to engage with the committee on the annual report of the Department with the focus on the following Expenditure incurred by the Department: Irregular expenditure Fruitless and Wasteful

MANDATE OF THE DEPARTMENT The Departmental mandate is derived from chapters 3,5, 6,7,9 and 13 of the Constitution. Our primary mandate is to: Develop and monitor the implementation of national policy and legislation seeking to transform and strengthen key institutions and mechanisms of governance to fulfill their developmental role; Develop, promote and monitor mechanisms, systems and structures to enable integrated service delivery and implementation within government; and Promote sustainable development by providing support to and exercising oversight over provincial and local government.

The Programmes of the Department Administration Local Government Support and Intervention Management Institutional Development National Disaster Management Community Work (PEP)

2015/16 AUDIT OUTCOME The Department of Cooperative Governance received a qualified audit opinion for the year ended 31 March 2016. The basis for the qualified opinion relates to the following aspects: 2.1 Goods and services Insufficient appropriate audit evidence for payments made to Community Work Programme (CWP) Implementing Agents as the department could not provide accurate and complete substantiating records, as required by the contracts signed with Implementing Agents. 2.2 Movable tangible capital assets Insufficient appropriate audit evidence for movable tangible capital assets, as the department did not maintain a consolidated and complete asset register for the Community Work Programme that adhered to the minimum requirements for an asset register as prescribed by the National Treasury. Additionally, assets were not in all instances measured in line with the prescripts of the Modified Cash Standard on capital assets.

2015/16 AUDIT OUTCOME (Cont.) Although the Department developed and implemented a Post Audit Action Plan at the end of each audit process and notwithstanding efforts to progressively improve the audit outcomes over the financial years, recurring audit findings were experienced. The main reason for the recurring audit findings, such as irregular expenditure, over-under statements and non-compliance to legislative and policy requirements are the dependencies on different role-players. 2. An Integrated Management Tool, with a specific focus on the root causes of audit findings as well as on addressing other internal control weaknesses identified has been developed. 3. Improved efforts are made to monitor and evaluate the progress with the implementation of the actions identified to address the internal control weaknesses, as far as possible, through existing departmental governance structures.

IRREGULAR, UNAUTHORISED, FRUITLESS AND WASTEFUL EXPENDITURE “Irregular expenditure” means expenditure, other than unauthorised expenditure, incurred in contravention of or that is not in accordance with a requirement of any applicable legislation and regulations. Such expenditure does not necessarily mean that money had been wasted or that fraud had been committed. It is an indicator of non-compliance in the process that needs to be investigated by management to determine whether it was an intended error, negligence, done with the intention to work against requirements that procurement should be fair, equitable, transparent, competitive and cost effective.

UNAUTHORISED, IRREGULAR, FRUITLESS AND WASTEFUL EXPENDITURE “Unauthorised expenditure” means – (a) overspending of a vote or a main division within a vote; (b) expenditure not in accordance with the purpose of a vote or, in the case of a main division, not in accordance with the purpose of the main division. “Fruitless and wasteful expenditure” means expenditure which was made in vain and would have been avoided had reasonable care been exercised. The Department did not incur any Unauthorised, Fruitless and Wasteful Expenditure during the 2015/16 financial year.

IRREGULAR EXPENDITURE The irregular expenditure reflected in the 2015/16 Annual Financial statements of the Department are accumulative figures flowing from the previous financial years. The bulk of the irregular expenditure incurred arose as a result of procurement by the Implementation Agents for the Community Work Programme (CWP) for the purchase of tools and materials, as part of their execution of the CWP at community level. The remaining irregular expenditure was incurred, mainly as a result of payments done without prior approval of deviations and/or obtaining the minimum number of quotations. Although these expenditures were incurred in contravention of supply chain management requirements, the funds were spent in line with the objectives of the Department and the department received value for money. The Department of Cooperative Governance reported an amount of R442,458 million as irregular expenditure for the 2015/16 financial year against R155,375 million in the 2014/15 financial year, which reflects an increase of 184.7%. As reflected above, the new group of CWP IAs started on 01 April 2014. Consequently, the bulk of procurement done by the IAs and the irregular expenditure incurred by the Department took place in the 2015/16 financial year.

THE NATURE OF THE IRREGULAR EXPENDITURE FOR THE DEPT Non-compliance of Community Work Programme (CWP) Implementing Agents (IA) to prescribed supply chain management procedures. Payments made without valid Tax Clearance Certificate Minimum number of quotation not obtained Incorrect/ inconsistencies in criteria utilised to evaluate bidders Extension of expired contract not obtained Deviation from standard supply chain management procedures not approved The details of the corrective actions to mitigate the root causes will be dealt with in the slides to follow

2015/16 IRREGULAR EXPENDITURE - KEY ROOT CAUSES AND CORRECTIVE MEASURES ROOT CAUSES OF IRREGULAR EXPENDITURE REASONS AND CORRECTIVE MEASURES/CONTROLS Payments made without valid Tax Clearance Certificate Notwithstanding the efforts made previously to avoid irregular expenditure on this matter, irregular expenditure was still incurred, mainly on multi-year contracts. Controls have been put in place to ensure that valid Tax Clearance Certificates are available for all multi-year contracts as part of the Central Supplier Database. For all other procurement, the Department only utilises service providers registered on the Central Supplier Database, with effect from 01 April 2016, which should address this problem. Minimum number of quotation not obtained Irregular expenditure was still incurred as a result of the fact that the minimum number of quotations was not obtained, mainly for amounts below R10 000.00 and no detailed motivations were provided for such cases. Responses are now invited from suppliers until the required number of price quotations are obtained, where possible. In cases where the minimum number of quotations cannot be obtained, a detailed motivation is provided together with the evidence of the attempts to obtain the minimum number of quotations for approval by the delegated official(s).

2015/16 IRREGULAR EXPENDITURE - KEY ROOT CAUSES AND CORRECTIVE MEASURES (Cont.) ROOT CAUSES OF IRREGULAR EXPENDITURE REASONS AND CORRECTIVE MEASURES/CONTROLS Extension of expired contract not obtained Irregular expenditure were still incurred as a result of the fact that the necessary prior approvals were not obtained for the extension of contracts, prior to their expiry dates. The main reason for this irregular expenditure was the lack of documented processes and weak contract management controls. The Department developed a detailed Contract Management Procedure that are in the process to be rolled-out to all Units in the Department. An integrated and complete Contract Management database for the Department will be maintained as per the Standing Operating Procedures. Project and Programme Managers will at least six-months before the expiring date of contracts be requested for guidance on the way forward. All requests for the extensions of contracts will also be routed via the Supply Chain Management Unit to ensure compliance with supply chain management requirements, before approval by the relevant authority. Deviation from standard supply chain management procedures not approved. The main reason for the irregular expenditure in this regard was the fact that end-users did not obtain prior approval for the deviation from the standard supply chain management procedures. Develop and implement Standard Operating Procedures for the procurement of goods and services by all end-users. Conduct awareness sessions on supply chain management requirements and reforms for departmental end-users. Supply Chain Management to ensure that all deviations from standard supply chain management procedures are approved by the relevant delegated official.

2015/16 IRREGULAR EXPENDITURE - KEY ROOT CAUSES AND CORRECTIVE MEASURES (Cont.) ROOT CAUSES OF IRREGULAR EXPENDITURE REASONS AND CORRECTIVE MEASURES/CONTROLS Incorrect/ inconsistencies in criteria utilised to evaluate bidders The main reason for this irregular expenditure is due to the different interpretations of the evaluation criteria of bids: Implement improve administrative compliance reviews for all stages of the tendering process, before finalisation. Training of new Bid Committee members. Non-compliance of Community Work Programme (CWP) Implementing Agents (IA) to prescribed supply chain management procedures. The main reasons for the irregular expenditure incurred by the CWP IAs seems to be the lack of understanding of government procurement processes: Training on the CWP Standard Operating Procedures for procurement has been provided for all current IAs . An intensive induction programme and continuous reinforcement of training provided are planned for the new IAs to be contracted with effect from 01 April 2017. Compliance is being closely monitored and additional assistance and guidance is being provided to existing CWP IAs to facilitate compliance. The CWP Implementation Model and the Terms of Reference for the procurement of the new group of CWP Implementing Agents are being reviewed to address the risks that are currently being experienced.

IRREGULAR EXPENDITURE In the 2014/15 financial year the Department incurred irregular expenditure to the value of R155 375 000. CWP Contract R 31 898 000 CWP Procurement R 81 732 000 Other SCM non-compliance R 19 352 000 Total R155 375 000 R 22 393 000 of the above-mentioned amount of irregular expenditure was consulted with National Treasury for condonement. Although the amount was not condoned by National Treasury, the amount was also not recoverable.

IRREGULAR EXPENDITURE (Cont.) With reference to the 2015/16 financial statements, the following Irregular Expenditure figures were reflected: 2015/16 2014/15 R'000 Reconciliation of irregular expenditure Opening balance 550 055 417 073 Prior period error   - As restated Add: Irregular expenditure - relating to prior year 39 825 Add: Irregular expenditure - relating to current year 442 458 155 375 Less: Prior year amounts condoned Less: Current year amounts condoned Less: Amounts not condoned and recoverable Less: Amounts not condoned and not recoverable (22 393) Irregular expenditure awaiting condonation 1 032 338

IRREGULAR EXPENDITURE (Cont.) In the 2015/16 financial year, the department incurred irregular expenditure to the value of R 442 458 000, which can be summarised as follows: CWP Contract R 106 149 000 CWP Procurement R 323 407 000 Other SCM non-compliance R 12 902 000 Total R 442 458 000 An additional amount of R 39 825 000 was identified as irregular expenditure related to CWP for the 2014/15 financial year, but only identified in 2015/16. The Department is in the process of investigating these cases of irregular expenditure to request approval for possible condonement and to determine liability to implement the necessary corrective and/or consequent management actions.

IRREGULAR EXPENDITURE (Cont.) To date, the following summary status on the Irregular Expenditure (IE) can be provided: R’000 IE investigated and concluded 15 606 IE under investigation for consultation with NT 599 105 IE under investigation and not concluded: 417 627 Total Irregular Expenditure as per the AFS 1 032 338

KEY POSSBILE IRREGULAR EXPENDITURE FOR 2015/16 COMPANY AMOUNT R’000 STATUS OF INVESTIGATION DHLADHLA FOUNDATION 221,214 Not yet completed SERITI INSTITUTE 65,135 INSIKA FOUNDATION 54,807 SEBOKA TRAINING 26,309 THEMBALETHU DEVELOPMENT NPC 19,358 LIMA RURAL DEVELOPMENT 14,178 THABISO / 3LD 11,000 BORDER RURAL COMMITTEE 9,472 SIYAKHOLWA DEVELOPMENT FOUNDATIO 8,082

KEY POSSBILE IRREGULAR EXPENDITURE FOR 2015/16 (Cont.) With regard to the following companies letters were issued to the respective officials to provide reasons for having incurred the IE: COMPANY AMOUNT R’000 STATUS OF INVESTIGATION RIVERSIDE OFFICE PARK TRUST 4,568 Not yet completed BHADRISH DAYA ATTORNEYS 4,480 CITY INSIGHT PTY LTD 1,749 ABLAND 813 SEKELAXABISO (PTY) LTD 329 TOKISO DISPUTE SETTLEMENT(PTY)L 326

INVESTIGATION REPORTS Names of the people related to the cases under investigation have can not been provided at this stage. Investigations on the CWP tender processes were concluded. The decision to institute disciplinary action on these cases was deferred. The reason for the deferment was that a detailed forensic audit on Project Management Fees and Procurement of goods and services was initiated.

INVESTIGATION REPORTS Investigations An investigation was conducted into various allegations relating to possible improper procurement of travel management solutions and abuse of travel benefits in the Department of Cooperative Governance. The scope of the audit was to investigate possible fraudulent and/or irregular transactions perpetrated through travel, accommodation and conferencing arrangements under the stewardship of the department’s travel agency. The allegations also included abuse of travel privileges, not in accordance with departmental policy. There was also potential conflict of interest by some officials through colluding with the travel agency to book venues where they might possibly have an interest. The report had been issued as at the end of February 2016. A follow-up investigation (phase 2) is currently in progress. The department has also implemented disciplinary and criminal processes with regard to those involved in the said fraud. An investigation was conducted into possible tender irregularities in the appointment of the Implementing Agents for the Community Work Programme as well as the review of irregular expenditure incurred by the programme. The investigation was concluded at the end of March 2016 and the department is in the process of following-up on the recommendations made. The Department has subsequently appointed a service provider to assist with implementing the recommendations made.

CONCLUSION The department is aware of the Irregular expenditure and challenges faced Effort is being made to address the root causes Investigation is being made to determine if there is fraud and to take the necessary corrective action