Department of Labour 2009/10 Annual Report and performance: Auditor-General, Research Unit comments

Meeting report

Department of Labour (DoL) 2009/10 Annual Report & performance
Briefing by the Auditor General South Africa (AGSA) on key issues and concerns
The Chairperson noted that National Treasury would approve the budget for the Department of Labour (DoL or the Department) on the recommendation of Parliament, and that it was the duty of this Committee to determine whether the Department’s allocation from National Treasury was adequate, and to motivate for an allocation to be awarded.

She noted that representatives of the Auditor-General South Africa (AGSA) would assist the Committee in reaching a determination on the financial needs of the Department.

Ms Meisie Nkau, Business Executive, AGSA, said that AGSA would not comment on spending patterns, as that would be a function of National Treasury, but that it would rather focus on instances of irregular spending.

Mr I Ollis (DA) asked whether the Committee would get a briefing by the National Treasury.

The Chairperson explained that the National Treasury, although it did brief Directors-General, seemed to be unwilling to brief the Committee. She asked the Parliamentary Researcher whether she could comment.

Ms Sindisiwe Mkhize, Parliamentary Researcher, said that she was not privy to the exact contents of the correspondence between the Committee and National Treasury about this briefing, and could thus not comment, although she had been aware that in the past National Treasury would deliver briefings.

Mr Ollis said the Committee was doing a good job, but was being manipulated by parties outside the Committee. AGSA must ensure departments handled their allocated budgets in an honest, prudent and responsible way, and that the money was spent as intended. The function of this Portfolio Committee (PC) was to make sure that the DoL had enough money to finance all its programmes and sub-programmes for the financial year. This was impossible without National Treasury (NT) input of Treasury. If NT refused to assist, the Committee could not perform its function, and was essentially guessing about spending patterns. He thought the PC should complain about this internally, to government, to ensure that NT cooperation was gained.

Mr V Ndlovu (IFP) said that the Chairperson should get NT’s refusal to brief the PC in writing, and then agreed with the steps proposed by Mr Ollis.

The Chairperson said that National Treasury was approached before the last Parliamentary recess. This meeting was originally scheduled for 12 October 2010. She personally spoke to the Chairperson of the Standing Committee on Appropriations (SCA), because only the NT and this committee were privy to all financial matters of Parliament and State departments. On 8 October 2010, the SCA informed her secretary that none of its staff would be able to attend the meeting, because they were busy with other matters. She had then informed NT that it should attend the meeting, who in turn advised that the only person available to attend was the researcher of the SCA, who was also tied up with SCA matters. She agreed that the Committee had to write a follow-up to the letter to National Treasury to register its dissatisfaction with the manner in which it had been treated.

Ms Nkau tabled the presentation from AGSA. She noted that the Department of Labour also had a number of entities under its control. She drew attention to the fact that Productivity SA and NEDLAC were classified as Section 43 audits, and the Auditor-General (AG) opted not to audit them, but instead they appointed their own auditors and furnished their audits to AGSA.

She proceeded to present the audit outcomes of the entities.

In respect of the financial performance of DoL, she noted that in respect of tangible capital assets the DoL received qualifications in the previous three financial years, but a clean audit for this matter in the2009/10, since the previous concerns had been resolved. The DoL had originally struggled with resources, but had strengthened its resources, to clean up this area for the year under review. She hoped that the steps that the Department had taken were sustainable, noting that root causes of problems should be addressed by departments.

However, in respect of IT assets (Public Private Partnerships) she noted that a qualification had been recorded here for both the 2008/09 and 2009/10 years. This was of concern. A huge amount of money had been spent on this programme and she would explain the reasons for the qualifications.

She noted that the significant uncertainties, as well as the fact of irregular expenditure, meant that the DoL received an Emphasis of Matter (EOM) comment for the financial year 2009/10.

She noted that reports on predetermined objectives (previously called an “audit of performance information”)  was the subject of comment under “Other Matters” (OM) , in respect of 2005 to 2009 financial years, and of the “Comment Report on other Legal and Regulatory Requirements” (ROLRR) for 2009/10.

In regard to performance information she said that AGSA normally suggested that when departments or entities set their targets and strategic plans, those plans had to be aligned with specific budgets. This made it easier for oversight bodies to see whether the departments had overachieved or underachieved within their budget, in turn making it easier to assess and monitor their spending trends. In practice, the spending had to be monitored on a monthly basis within departments, so that corrective action could be taken in time, although the Public Finance Management Act (PFMA) only required that it be done on a quarterly basis.

Non-compliance with applicable legislation received a OM comment for 2007/08 and 2008/09 and a ROLRR comment for 2009/10. This needed attention from the Department. Internal Controls received a OM comment for 2008/09 and a ROLRR comment for 2009/10.Investigations received a OM comment for 2008/09 and an Other Reports (OR) for 2009/10. These required attention from the Department.

She outlined the reasons why AGSA had given a qualified opinion in respect of the IT- PPP. There were material differences between the general ledger and financial statements, and the IT assets register was not adequately maintained, in accordance with the requirements of National Treasury, as a number of assets did not have purchase dates, did not have physical locations, and did not have cost prices recorded. AGSA could not verify what was reported in the financial statements.

The AG normally gave the DG and the Minister a key control document, detailing the key controls that had to be in place to address issues like asset management. One of the key controls was monthly reconciliation of the asset register with the general ledger and the financial statements. Most of the departments and entities did not do this monthly reconciliation, evaluation and reporting, instead trying to do it at year end, resulting in huge numbers of adjustments being needed, which often could not be finalised before AGSA had to produce the report. Setting a discipline of monthly reconciliation would go far towards ensuring clean administration and accurate financial statements.

The Department had further reported a contingent asset of R 5 million from a supplier, which AGSA could not verify. This meant that there was a supplier who owed the Department R 5 million, which it was still trying to retrieve. This represented a 100% in contingent asset from the previous year.

There was also a 473% increase in irregular expenditure from the previous year, which resulted from expenditure that was incurred without following proper delegation levels and supply chain procedures that were not properly followed. In terms of National Treasury Regulations, the Department should implement processes, or take disciplinary action against officials who allowed the irregular expenditure, and apply properly for condonation..
 
The AG gave a qualified opinion on performance information. Firstly, there had been inadequate  presentation of reported information. Secondly, there was insufficient reporting on all predetermined objectives in the Annual Report. Even objectives not achieved had to be reported on, with reasons for non-achievement. Thirdly, reported information was not consistent with planned objectives, indicators and targets as set out in the strategic plan. Fourthly, reported indicators were not reliable when compared to source information.

In response to these poor audit outcomes, the DoL had drawn up action plans, to address the issues raised in the audit. AGSA would go into the DoL on a quarterly basis, to monitor whether these action plans were being followed, the progress, and whether the deficiencies raised were being addressed. This process was currently underway.

In line with International Auditing Standards (IAS), AGSA pointed out the root causes of the irregularities identified in the audit report. It also looked at the internal controls and assessed whether these internal controls were functioning in such a way that DoL could produce the predetermined objectives within budget, and thus have clean audit opinions.

One of the internal control deficiencies that AGSA had identified was a lack of oversight over financial and performance information. Although there was some oversight, it was not stringent enough and the standards were not set high enough to ensure that a clean audit was achieved, as evident from the report on the IT –PPP assets, as well as the findings on performance information.

Ms Nkau said she had earlier alluded to the fact that the DoL should be aligning predetermined objectives with a specific budget, and monitoring, monthly, whether the goals were being achieved. The Department lacked mechanisms and processes to facilitate these procedures, in relation to service delivery, despite the fact that service delivery depended heavily on having the processes in place. Although the Department had procedures to monitor the financial side, there were none to monitor and evaluate service delivery.

Lack of leadership was also evidenced by management failing to put any procedures in place to bring the administration of the IT-PPP in line with required norms. This was an area that drew a qualification in the previous and current financial years, showing that there were no improvements.

Although she was focusing in this meeting on issues raised in the audit report, Ms Nkau noted that AGSA had also issued a management report, that would detail specific areas of concern that, whilst not necessarily relevant to the Annual Report, could cause qualified audits in future.

The second area of concern around internal controls was Financial and Performance Management. Here AGSA identified the lack of proper supporting documentation to substantiate the amounts disclosed in the financial statements, in respect of IT-PPP assets, as well as on performance information. Another area of concern was that the Internal Audit function was ineffective, largely due to capacity constraints, although she believed the Department was dealing with these.

Ms Nkau noted that the Committee had requested advice and recommendations on the budget that the DoL had requested. This was outside AGSA’s jurisdiction. However, she suggested that the Committee should focus on the areas AGSA had raised, particularly the IT-PPP issues, and ask the Director General to give proper feedback on what steps had been taken to address this. The current financial year was already into its eighth month, and if sufficient steps had not been taken, this IT-PPP area might get a qualified opinion again. She also added that AGSA was willing to attend the meeting when the Department explained its progress, and could verify what was being said.

She summarised that other areas of concern were predetermined objectives, performance information, monitoring processes, and reporting processes, as well as the necessity to link the targets to budget, in order to pinpoint accountability to specific focal areas of the strategic plan and annual report.

AGSA report on DoL entities
Ms Daisy Ledwaba, Senior Manager, AGSA, reported on the entities.

Unemployment Insurance Fund
She outlined the current entities as Unemployment Insurance Fund (UIF), the Compensation Fund (CF), The Commission for Conciliation, Mediation and Arbitration (CCMA), Sheltered Employment Factories (SEF) , Productivity South Africa (PSA), and the National Economic Development and Labour Council (NEDLAC). The National Skills Fund (NSF), formerly under the DoL, had moved to the Department of Higher Education on 1 April 2010.

The UIF received an unqualified audit opinion for the financial years 2008/09 and 2009/10, but in respect of performance outcomes there were significant findings. The fact that the UIF received an unqualified audit opinion for two consecutive years proved that it had adequate financial systems in place. Performance information was qualified, firstly, because the reported information was not consistent with planned objectives, planned and reported performance targets were not specific and/or time bound, planned and reported indicators were not well defined, some reported targets were not reliable, valid, accurate or complete when compared to the source information that was provided to support the reported target, and because some reported targets were not reliable, valid, accurate or complete since inadequate source information was provided. For performance management, there was a lack of an adequate system for reporting on predetermined objectives.

AGSA recommended that the UIF must address all the issues on performance information in re-designed action plans. She noted that the audit outcomes that AGSA was reporting should also be reflected in whatever the DoL was saying about the UIF in its report.

Compensation Fund
The Compensation Fund (CF) had a disclaimer audit opinion for 2008/09 and a qualified audit opinion for 2009/10, but a clean audit on performance outcomes. The disclaimer had been given on financial performance since the CF had had a challenge in maintaining adequate controls over supporting documentation. This was still an issue. In revenue and debtors, there were inadequate monitoring controls over overdue debts, resulted in the accumulation of incorrect provisional assessments and materially incorrect debtors with credit balances. The amounts were unable to be verified. A backlog in the scanning of documentation on to the CF’s electronic document management system for claims resulted in the CF not being able to retrieve appropriate supporting documentation for claims incurred. This had been a problem over the last three years.

She highlighted an emphasis of matter. Irregular expenditure was incurred due to non-compliance with supply chain management processes. Fruitless expenditure was incurred due to interest paid on late payments of medical claims.

There had been inadequate internal controls, due to lack of leadership, so there was inadequate follow-up on action plans. If the CF had submitted action plans with milestones each year, this could prevent the recurrence of the issues that caused qualified reports in the past. However, no system was in place to ensure that the action plans were adhered to, so the incorrect issues recurred year after year. Generally, there was lack of financial and performance management. There was a lack of financial systems to support reporting on the assessment of revenue and debtors, as well as medical claims.

She noted that there were investigations in progress relating to alleged fraud on payment of medical claims. These were still in progress, and would be followed up AGSA for the next audit.

Commission for Conciliation Mediation and Arbitration
The CCMA had unqualified audit opinions for 2008/09 and 2009/10 and a clean audit, but with emphasis of matter, on performance  outcomes. The sustainability of the CCMA as a going concern was in doubt as at the year end, and the expenses of the entity exceeded its assets.

The emphasis of matter related, firstly, to irregular expenditure to the tune of R58.346 million, in prior years, which amounted, in the current year, to R25.328 million. This was due to non-compliance with Supply Chain Management (SCM) processes. Fruitless expenditure was incurred relating to penalties on late payment of provident fund payments of R11 000.

The second reason for emphasis of matter was performance reporting. There was no effective monitoring and evaluation, as there was no tracking of progress against outputs. The planned and reported indicators were not well defined.

The third reason was a lack of internal controls. There was a lack of leadership and a lack of adequate oversight. There were no processes and procedures in place to monitor and evaluate on an ongoing basis, as shown by the failure to detect and correct fruitless expenditure.

There was a lack of adequate monitoring and review by management. Although quarterly reports were being submitted, the leadership did not follow up on the issues reported.

Sheltered Employment Factories
The Sheltered Employment Factories had an unqualified audit opinion for the financial years 2008/09 and an adverse audit opinion for year 2009/10. It did, however, receive a clean audit for performance outcomes.

The reasons for the adverse opinion related to financial performance. There was non-compliance with the prescribed financial standards, including inadequate supporting documentation relating to inventories, cost of sales, property, plant and equipment disclosures. The emphasis of matter was due to irregular expenditure resulting from non compliance with supply chain management processes. There was fruitless and wasteful expenditure on overpayments of salaries to resigned employees.

There was a lack of internal controls, starting with inadequate leadership, and a lack of oversight responsibility. There was a lack of quality, reliable monthly financial statements and management information. There was a lack of governance around risk identification, internal audit, and adequacy of systems for preparation of performance information. One of the reasons for the regression was that there was no Chief Financial Officer at the Sheltered Employment factories.

Productivity SA
Productivity SA had unqualified outcomes for both the 2008/09 and 2009/10 years and a clean audit for performance outcomes.

NEDLAC
NEDLAC received unqualified audit opinions for both financial years 2008/09 and 2009/10 and a clean audit outcome for performance outcomes.

Discussion
Ms F Khumalo (ANC) asked why NEDLAC and Productivity SA, as entities that fell under the labour Department, were not audited by the AG.

Ms Nkau replied that AGSA opted not to conduct these Section 43 audits, but they were reported on. PFMA prescribed that AGSA and the entity must select a company to do the audit. In future that limited involvement of AGSA would change, and it would attend audit committee meetings of the entities to develop more insight into their operations and processes, would give more guidance to the audit company as to what it should examine in particular, and would ensure that the audit reports were more substantial. In time, AGSA might take these audits back.

Ms Khumalo asked for how long the Compensation Fund had been unable to supply supporting documentation, and how AGSA had tried to get it.

Ms Nkau replied that the CF had a disclaimer in 2008/09 and a qualified audit opinion in 2009/10. A disclaimer meant that there was a lack of supporting documentation. All the documents that were submitted to the CF had to be scanned electronically into the system. There was a huge backlog, and the capacity of the scanner did not meet the need. Those that had been scanned were not filed in an easily-accessible manner, either for AGSA or the officials, and this had been a recurrent problem over the years.  The audit outcome had improved, from a disclaimer to a qualification, but the issue had not been resolved yet. AGSA could ring-fence the area in which the problem occurred, to receivables and revenue. AGSA asked CF for supporting documentation in respect of the sample being audited, but several requests would be issued, with AGSA also often having to assist in searching for that information, until AGSA could wait no more since it must operate within legislated deadlines.

Mr Ndlovu referred to the explanation for the audit outcomes on the UIF, noting that nothing was said about its leadership, and asked why this was so.

Ms Nkau replied that the leadership set the tone for the organisation. A good leader would be able to identify risks, recruitment and performance gaps, and take appropriate and effective controls to address them in order to ensure achievement of desired financial and performance outcomes. If AGSA was issuing continuously qualified audit opinions, this meant that leadership was not in control, and thus not performing properly. The UIF’s financial statements were cleanly maintained, but there were some issues around performance. These included that some of the set targets were vague and could not be verified easily. This was also a leadership issue, and her failure to mention this specifically was an oversight.

Mr Ndlovu asked who was responsible when the CF failed to comply with SCM processes or failed to pay medical claims on time.

Ms Nkau replied that the leadership was responsible. Leadership set the tone. It had to make sure that there were policies and procedures, and that they were followed and complied with. Leadership had to make sure that accurate complete monthly performance and financial statistics had to be compiled. The leadership also had to take steps against those who did not comply

Mr Ollis said that there was a need to look for general trends. He understood that the business plan of the DoL was too vague, as were the targets, so that performance and progress could not be measured. There was good management of financial affairs, but less management on service delivery. He wondered if this was an accurate description of the trends, which should be identified.

Ms Nkau replied that most targets were not specific, or time bound. AGSA was currently assisting the leaders of the entities to set more specific and time-bound targets. This issue would remain a challenge for the current financial year, as the strategic plan had been approved, but could be addressed more specifically in the 2011/12 financial year. Across the whole public sector, both departments and entities had vague targets.

She added that it was true that most departments and public entities focused on their financial side, on which AGSA expressed an opinion, but did not pay too much attention to performance. AGSA had phased in an audit of performance information, specifically to prepare departments for the future AGSA opinions on performance. The information that in future would be in a performance audit was contained in the management report. The entities should be sharing the opinions with the Committee, through their management reports. She believed that AGSA’s focus on the areas of internal control, leadership, financial management and governance, as required by IAS, prompted all entities to ensure that they had internal controls in place to ensure proper financial control, as well as achieve a high standard of service delivery.

Mr Ollis said that the IT-PPP system was a disaster.

Ms Nkau replied that there was an action plan on the table for this. She believed that it was also a capacity issue. The Department had to be able to identify the challenges it faced regarding the PPP assets. She was cautiously optimistic on this point. She added that although much of the financial year had passed, it was
possible to do damage control on performance information. Regular monitoring and reporting processes, if not already instituted, could still be put in place for the remainder of the financial year, so that whatever was presented at year end would at least be accurate, if not complete.

Mr G Boinamo (DA) said that it did not appear that the DoL had set any goals to manage performance. This made it difficult to find out whether the Department had met its predetermined objectives. He asked how it could spend when no goals were in place.

Ms Nkau replied that in some cases departments omitted to report what was in the strategic plan, or reported something else. Entities who focused on financial and not performance issues might find at year end that although they spent money legitimately, there had been no monitoring of spending against targets, and might thus not be aware whether they had reached their strategic objectives. It was crucial that plans and budgets should be linked, to exercise internal controls and execute corrective actions where necessary

Mr Boinamo asked why people were paid after they had resigned. He also asked what AGSA would do, when the same shortcomings recurred year after year in the same entity, and what recourse there was to remedy the situation. He asked what prevented AGSA from auditing entities more than once a year, to prevent money being wasted.

Ms Nkau said that if the client department did not respond to the findings of AGSA, AGSA must still maintain independence. AGSA issued the management and audit reports and requested client departments to put together an action plan, by a certain date, to address those findings. That action plan would then be evaluated by AGSA to check that it could address the issues in the audit report. Those steps were sufficient in the context of the audit function. However, AGSA then also went further and did agree to do quarterly reviews. AGSA would report to the executive and the Minister, raising red flags where necessary. The Minister was empowered to address the problems. The oversight committee and the executive were empowered by information received from the AG.

The Chairperson asked what was the most important matter taken into consideration that would determine whether AGSA would issue a qualified or unqualified opinion. Service delivery was difficult to measure. It was hard to determine whether what the DoL and its entities were reporting as achievements was in fact accurate. There was lack of leadership and oversight in the DoL, and if the DoL itself was deficient in this respect, then the entities could not be expected to be on the right track. Irregular and wasteful expenditure was easier to understand. The Committee wanted to be assured that the budgets it approved were spent to deliver services to the population. She asked at what stage AGSA could say that “enough is enough” after an entity continued to receive qualified opinions in succession.

Ms Nkau replied that AGSA had to remain independent. It could not assist departments in determining what their performance criteria had to be, but could only give guidance. She agreed that the DoL must set the standards and entities would follow. She suggested that this question be put to DoL for comment.

Mr Boinamo asked whether AGSA, when reporting to the executive, delivered the report and a recommendation.

Ms Nkau replied that each finding in the management report had a recommendation attached.

Mr Ollis reiterated his previous question and asked Ms Nkau whether there were any significant concerns that were not addressed.

Ms Nkau said that the internal asset register of the Department had been cleaned up in the past financial year, but could still be an area of concern. She recommended that the Department should be asked to report on this consistently until the issue had stabilised.

The Chairperson said that the management report sent by AGSA to DoL asked DoL to draw an action plan to address each issue raised. She reiterated that if DoL was brought on track, its entities should follow. She asked how many letters AGSA had written, and whether it was satisfied with the responses and action plans produced by the DoL.

Ms Nkau said that for the 2009/10 financial year, an interim financial report would be submitted, in around March, then a final report. She reflected on the action plans drawn up by DoL for the previous financial year. In this year, the biggest problem related to capital assets rather than PPP, and to the reconciliations going back several years. AGSA was satisfied with the action plans the Department put on the table. The action plan was monitored and its implementation was reviewed. She thought the main challenge relate to capacity, since the unit had been staffed only quite late in the process and it took a while to work through the backlog. The amount of work required was underestimated, but in the end it did achieve its goals, with the result that in the 2009/10 financial year, the capital assets were correct.

Research Unit presentation
Ms Sindisiwe Mkhize, Parliamentary Researcher, clarified, in response to earlier comments about the availability of a researcher from SCA, that this researcher was the only one out of about 70 staff who researched spending trends. His services were much in demand during the current budget review processes, and he was permanently pressed for time, which was why he was unavailable on 12 October.

Mr Pheleleni Dlomo, Parliamentary Researcher for the Standing Committee on Appropriations (SCA), presented an analysis of the expenditure in the Department of Labour (DoL) for the 2009/10 financial year, and the first quarter of the 2010/11 financial year.

He firstly cautioned the Committee about how future Budgetary Review and Recommendation Report (BRRR) could be more smoothly processed. The SCA dealt with all national government departments and monitored their expenditure, receiving departments’ reports on how and why money had been spent. He encouraged Members of this PC to sit with the SCA when it did its year-end monitoring, to enable them to check the expenditure, and familiarise themselves with the SCA’s concerns and requirements.

He added that when dealing with BRRR processes, PCs should look at information broader than that from the Department, AGSA and National Treasury. Other oversight bodies, such as the Public Service Commission and Financial and Fiscal Commission, also gave analyses and recommendations, and this could give the PC a more balanced insight into performance of the Department.

He noted that he would present a brief analysis of the DoL’s expenditure for the fourth quarter of 2009/10 and the first quarter of 2010/11, as required by Section 5(2) of the Money Bills Amendment procedure and Related Matters Act (the Act). This would assist the Committee to evaluate and assess the delivery of services and performance of the Department against available resources.

The DoL was initially allocated an amount of R2.1 billion in the 2009/10 financial year. During the adjustment period, R36 million was shifted elsewhere, leaving R2.09 billion, or 4.2% of the main budget. The Department spent R2.06 billion (98.7 % of its budget), with R26.8 million (1.2%) unspent. The shifting of funds was allowed by Section 43 of the Public Finance Management Act (PFMA), but it had unintended consequences of defeating the original objectives of the affected programmes.

He noted that a shift in funds could compromise the programme from which funds were taken. The original strategic plan tabled at the beginning of the year would also become distorted, so that what it finally reported on at year end did not match the original plans, but achieved matters not necessarily planned. This meant that even if a programme spent 100% of the funding, this did not guarantee no shifting or virements.
The DoL’s underspending was in respect of programmes for Administration, Service Delivery, Employment and Skills Development Services/ Human Resources, the Labour Policy and Labour Market Programme and Social Insurance.

He outlined more details. The Administration Programme was initially allocated R392 million for the 2009/10 financial year. During the adjustment period R31.3 million was shifted from other programmes to this one, bringing the total allocation to R419 million. All of this was spent. However, he reiterated that although shifting of funds was allowed by PFMA, it meant that the programme from where funds were shifted was compromised. The fact that funds needed to be moved also indicated poor financial planning  and lack of understanding of the Medium Term Expenditure Framework (MTEF) implications, which, when used correctly, already gave ample chances for departments to do adjustments prior to implementation.

The Service Delivery Programme (Programme 2) was allocated R712.5 million for the 2009/10 financial year, after adjustments. R710 million (99.7%) was spent, and 0.3 % was under-spent. Under-spending was due to lower numbers of Hilux bakkies having been bought (R74.3 million) and a failure to spend on machinery and other equipment. R72.3 million was shifted from the compensation of employees to other programmes, because high vacancy rates meant that the money was not needed for salaries. He said that the vacancy rates reported were 13.8% in 2009/10 and 11% in 2010/11, although a National Treasury report showed a vacancy rate of 24% in 2009/10.

When there was a high vacancy rate amongst labour inspectors, this meant that many places of work were operating without being regulated. The DoL should have appointed and trained labour inspectors, but instead shifted funds away from the programme. It was already struggling to retain its labour inspectors, who were lured to private sector companies by higher salaries.

The Employment and Skills Development Services/ Human Resources Development Programme (Programme 3) was allocated R406 million for the 2009/10 financial year. The programme spent R390.6 million (96%) of its budget. The under expenditure of  R16.3 million was due to the shift of Skills Development functions from the DoL to the newly formed Department of Higher Education and Training (DHET). Some of the unspent funds were related to the Quality Council for Trade and Occupation (QCTO). The Department indicated that the unspent funds would be rolled over to the DHET for the establishment of the QCTO and once-off filling of vacancies. R74.2 million was shifted from this programme to other programmes during the adjustment period of the 2009/10 financial year.

The Labour Policy and Labour Market Programme (Programme 4) was allocated a total of R541.7 million for the 2009/10 financial year. The programme had managed to spend R536 million (99%).The under spending of R5.3 million was due to delays in the tender process for the Research Monitoring and Evaluation Agenda. The Department had applied for roll overs. Part of this under spending was attributed to the slower-than-expected payment of membership fees of international labour organisations, for which R9.2 million was budgeted, and only R8.6 million was spent. R40.7 million was shifted from other programmes to this one.

The Social Insurance Programme (Programme 5) was allocated a total of R8.9 million for the 2009/10 financial year. The programme had spent R6 million (67%) of its budget without any adjustments or additional budget. Under expenditure was due to slower-than-expected expenditure on administration costs for clams by civil servants injured on duty. The level of under-expenditure in this program remained a cause for concern, because of its compensatory nature.

This illustrated why the Committee should be looking to broader sources, not depending on the Department supplying information. The PC must verify its facts independently, in order to do effective oversight. The Department, for Programme 5, did not verify whether there was a reduction in people who were injured on duty, to explain the reduction in claims, and the report was signed without apparently questioning the statistics.

He then gave an analysis of the economic classifications.

Current payments were divided into two categories, namely, compensation of employees, and goods and services. Compensation of employees only spent about 98.9% of its adjusted budget in 2009/10, although  Programme 3 (Skills Development) was unable to spend R6.5 million in this category during the same period. R94.1 million was shifted from this category and 98.7% of this amount was from Programme 2 (Service Delivery). A total of R100.7 million was unspent in the same period. The under spending could be attributed to the high vacancy rate among labour inspectors, human resource practitioners and finance staff in the department, or to delays in payments to State Information Technology Agency (SITA) for data lines or to delays in payments to the Department of Public Works (DPW) for an operating lease agreement.

Payments delays were caused by the late submission of invoices from service providers. Departments should be enforcing time frames for the submission of invoices, in order to avoid delays in payments, and in order to pay suppliers on time, otherwise the figures would show under spending in one financial year and over spending in the next.

The budget for transfers and subsidies was  86.3% spent, and 78.8% of this was a statutory transfer in relation to the Skills Development Levies, whilst 7.5% was transferred to public entities and non-profit institutions.

It was not always clear how transferred funds were being spent in the programme to which they were transferred. When SCA asked the entities about the spending, they responded that the entities were accountable to the Minister of Labour. Because the PCs were the oversight bodies of the departments, it was PC who had to ask for that information, and hold entities to account for their spending, thus checking for any problems before the end of the financial year. This would curb the problems. This was the reason why he suggested closer engagement with the SCA.

No amounts or percentages were given for the Capital Payment (CAPEX) category, where spending had been poor, with slow spending on buildings and construction of the Rustenburg Labour Centre. The slower spending was due to delays in the tender process and the submission of claims from the Department of Public Works.

The level of underspending indicated a possibility that the Department might apply for rollover of funds to the 2010/11 financial year, and indeed this had occurred. Although it had applied for rollovers of R20.9 million, only R4.5 million was approved.

He noted that the PFMA allowed for virements and shifting of funds between programmes, and within a programme. However, there were certain requirements to be met by the accounting officer. Firstly, in terms of Section 43(2), the virement may not exceed 8% of the appropriation under a main division. It would not be authorised if an amount was specifically and exclusively appropriated for a purpose mentioned under a main division within a vote, nor if an amount was appropriated for transfer to other institutions, nor if an amount was appropriated for capital expenditure but was being shifted to defray current expenditure.

First quarter 2010/11 financial report
Mr Dlomo said that in the first quarter of the 2010/11 financial year, the DoL was allocated a total budget of  R1.78 billion. In the first quarter the Department had spent about R488 million, or 27.4% of its allocated budget. There were instances of over and under expenditure in that quarter.

He set out detailed figures for each of the allocations to the programmes (see attached presentation for full details). In the administration programme, the Department spent 20.6% of budget. For the household budget transfer, it spent R1.1 million, although allocated R158 000, or 698.7% of the allocation, which was funding redirected from other programmes, and which indicated bad budgeting. Although the household budget transfer had overspent, the programme as a whole had underspent.

In the Inspection and Enforcement Services (Programme 2) the Department had spent about 19.6% of the allocation in the first quarter, and although there was overspending on the transfer to household budget, it spent, overall, less than the benchmark of 25%.  

Mr Dlomo noted that not all departments were expected to comply strictly with the 25% because the nature of the service delivery and business might require different patterns of spending. For instance, Department of Public Works worked at a slower pace than other departments.

The Public Employment Services (Programme 3) spent 23.8% in the first quarter, and here, underspending was due to  delays in the clarification of roles and responsibilities of staff, as well as a decrease in claims by civil servants for injuries on duty.

The Labour Policy and Labour Market Programme (Programme 6) spent 43.6% of the allocation in the first quarter, due to high spending on transfers and subsidies to strengthen civil society, through a one off payment to trade unions for May Day celebrations, as also because of the first of two transfer payments to the CCMA. This programme was likely to shift funds across to itself, or request an additional budget.

He noted that the under-spending in the last quarter of the previous financial year, and the first quarter of the current financial year, was attributable in part to the high vacancy rate, and summarised that most vacancies were in the categories of labour inspectors, human resource practitioners and finance and other administrative staff. Another reason was delay in the procurement processes. Shifting and virements had had a negative impact on service delivery and showed inability of proper financial planning. The department was still struggling to project accurately for its transfers and subsidies budgets, particularly those that were transferred to household sub-programmes.

Mr Dlomo said that he could not speak for the DoL in any of these matters, but could answer questions that related to his research analysis

Discussion
Mr Ollis summarised what he understood that Mr Dlomo had said, and noted that the DoL’s budget had been reduced because it had been unable to spend in the previous financial year. The shifting of money from service delivery to administration programmes also meant that less was spent on service delivery>

Mr Dlomo said that he did not mention where specifically the virements went, so the Department must explain why one budget increased and another decreased. However, it was clear that service delivery did not match what had been presented in the strategic plans, because of the shifts in money during the financial year. Effectively the Committee had “rubberstamped” plans that had then been changed.

Mr Dlomo said there were gaps in the way National Treasury reported to the SCA. Chief Directors at National Treasury headed all sub-directorates, and Cluster spending was reported to those directorates.  Labour belonged to a cluster that submitted a report to a particular directorate in National Treasury, and issues could also be raised there. He said that although it was not clear where the money finally went, its source could be seen.

Mr Ollis asked why large sums of money were transferred to the unions COSATU and SACAWU. He understood the transfer to the CCMA, which must have explained why it needed the money, because of the increased number of retrenchments and unfair dismissals resulting from the economic downturn.

Mr Dlomo replied that the DoL should be asked to explain why it gave money to COSATU and SACAWU.

Mr Ndlovu said that if virements were allowed by the PFMA, this resulted in less money being available somewhere, and meant that the targets of service delivery and strengthening the inspectorate would not be achievable. He asked what would happen if a 8% virement wiped out an entire programme.

Ms Khumalo asked what happened if a Department performed the same shifting around of funds year after year.

Mr Dlomo replied that when funds were shifted from a first programme, something must be found to subsidise that first programme, so the shifting resulted in various holes being opened.

The Chairperson asked whether the R36 million repaid to National Treasury was in respect of one programme, or several.

Mr Dlomo replied that it was comprised of portions left over from different programmes. He stressed that if a department failed to spend its budget in one financial year, it would generally receive less money in the next financial year.

The Chairperson said that the Committee was very worried about the calibre and number of labour inspectors. She was under the impression that there was no money to capacitate this section, but now learned that it had been shifted. She wondered if there was a real problem in the DoL in recruiting and employing competent, qualified inspectors.

Mr Dlomo replied that the answer was not simple, as research and analysis showed that the money had been available. The PC would have to consider whether the spending had added value. Many departments shared this kind of challenge, and capacity problems were cross-cutting.  The competitive labour market affected all departments, so this meant that government had to look at why it was unable to retain personnel, what its competitors were doing to attract labour away, and what was being done to absorb the huge numbers of unemployed graduates.

Ms Mkhize agreed that the question of the inspectorate was of great concern. The budget was available for use, yet there were continual but changing excuses for not recruiting and training labour inspectors. Initially the DoL cited a turnaround strategy, which was not finalised nor implemented three years later, leaving service delivery and inspectorate issues unaddressed. The integration of the inspectorate services within the various departments was still pending, and had not been reported on to the Fourth Parliament. There were moves to align remuneration for inspectors across Departments of Health, Mining, Energy and Labour, to reduce movement between these, but the answer was still being given that there was no agreement how this must be structured or implemented. Although this policy had officially been halted, the Minister still referred to it as being due for implementation soon. She suggested that the Committee must ensure that DoL’s Deputy Director General took the Committee through the processes for the inspectorate, and must explain whether the turnaround strategy would address the remuneration issues for inspectors. It seemed that this was unlikely, but the DoL must give a clear explanation.

The Chairperson asked where the DoL’s greatest expenditure lay.

Mr Dlomo answered that for the current financial year, the Department had a budget of R1.7 billion. The largest amount was budgeted for compensation of employees at R1.2 billion, followed by goods and services, then capital payment assets. The Administration programme received the most money. Although more had been budgeted for compensation of employees, more was spent on transfers.  

Mr Ollis came back to his earlier statement about the spending, with which Mr Dlomo did not agree, and said that he had understood that money came from service delivery and was channelled to administration.

Mr Ollis asked Mr Dlomo to explain the figures in Paragraph 2.2.H e wanted to know whether the R712.5 million was before or after adjustments.

Mr Dlomo answered that it was after adjustments.

The Chairperson said that this had been a very useful exercise, which had enabled the Committee to learn more about National Treasury and the Standing Committee on Appropriations, with whom it must interact, especially when Annual Reports were presented. The greater the interaction, the more the Committee understood. She understood the time pressures on Mr Dlomo and now understood why National Treasury had declined to attend.

She noted some uncomfortable questions must be answered. The Director General was likely simply to reiterate what was in the reports. The Committee needed more specific and objective views, to inform its decisions and recommendations. She noted that attending meetings of the SCA would certainly be informative, and would like to interact with it, but that she and Committee Members had many demands on their time.

The meeting was adjourned.