SOEs grapple with billions in irregular expenditure

Stage 4 load shedding, kilometres of coal trucks blocking the roads, stranded train passengers, hundreds of ships floating outside harbours waiting to offload cargo, missing postal packages – and at the root of it is bad financial oversight at the relevant state-owned enterprise (SOE) tasked to provide services.

Minister in the Presidency Khumbudzo Ntshavheni was wrong when, while giving feedback on recent cabinet meetings on Monday, she said things in SA are improving and when she accused the private sector of deliberately trying to “collapse” SA.

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Irregular, fruitless and wasteful expenditure is so rife at state companies that it is impossible to calculate how many billions are lost to corruption, fraud and theft every year. Even the Auditor-General has noted in many of its audit reports that it is impossible to determine if the figures provided by the SOEs are accurate.

Context

Not all irregular spending is money stolen or wasted.

Irregular expenditure means expenditure incurred in contravention of or not in accordance with requirements of any applicable legislation, including the Public Finance Management Act (PFMA) – but a seemingly ‘innocent’ transgression of a tender requirement opens the door to corruption.

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Fruitless and wasteful expenditure is expenditure that was made in vain and would have been avoided had reasonable care been exercised.

PetroSA notes in its annual report that a few questions will determine whether expenditure should be classified as fruitless and wasteful or irregular:

• Could reasonable steps have been taken to avoid the expenditure?
• Were there policies and/or procedures governing the incurred expenditure?
• Is it material (for disclosure purposes)?

Whatever the classification, the task of looking at all the annual reports of the big SOEs and calculating a total figure for irregular and for fruitless and wasteful expenditure are overwhelming.

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A quick look at the biggest SOEs is enough to prove that billions are spent without proper financial oversight.

Prasa

The Passenger Rail Agency of SA (Prasa), which candidly admits that is failing to provide passengers with rail services close to what is required, reported in its last annual report that it is addressing irregularities.

“Several reports, including the Derailed Report by the former Public Protector, the auditor-general and the Special Investigations Unit (SIU) have made several findings and recommendations, particularly regarding contracts awarded to companies such as Siyangena and Swifambo.

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“In the year 2020/21, the auditor-general found that Prasa incurred R28.6 billion in irregular expenditure and financial mismanagement,” the directors wrote in their overview of the last financial year.

On fruitless and wasteful expenditure, the Auditor-General commented that the PFMA requires the disclosure of the particulars of all fruitless and wasteful expenditure that had occurred during the financial year in the financial statements but says it could not comment on Prasa’s figures in this regard.

“The group did not have an adequate system for identifying and disclosing all fruitless and wasteful expenditure and there were no satisfactory alternative procedures that I could perform to obtain reasonable assurance that all such expenditure had been properly recorded in the financial statements.

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“Consequently, I was unable to determine the full extent of the adjustment necessary to the balance of fruitless and wasteful expenditure stated at R659,2 million (2020-21: R385 million) for the controlling entity and R746,3 million (2020-21: R467 million) for the economic entity respectively,” it says in the audit report.

Eskom

The figures at Eskom are truly astounding, even considering that it is by far the biggest of the SOEs, and also generally accepted to be the most corrupt of them all.

The 2023 annual report states that irregular expenditure amounted to R5 billion in the year to end March 2023 compared to more than R10 billion in the previous financial year.

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“New transgressions amounted to R2.6 billion consisting of 37 incidents in the current year, whilst the remaining R2.4 billion relates to ongoing expenditure on 52 incidents previously classified as irregular.

“Fruitless and wasteful expenditure incurred during the year amounted to R105 million (2022: R3 million restated) for the group,” it reported, but added that there “is a risk that the reported information could be understated due to various challenges relating to identification, review and finalisation of instances of fruitless and wasteful expenditure”.

Eskom says losses due to criminal conduct to the value of R6 billion (R5.7 billion in 2022) were reported during the year.

It says steps were taken to improve governance and compliance.

“Eskom completed its review of the Zondo Commission report and is addressing the recommendations and ensuring appropriate legal remedies are being pursued.

“There are currently no outstanding disciplinary actions against individuals highlighted in the Zondo Commission report and no implicated individuals are currently employed by Eskom in relation to consequence management for delinquent employees. Several civil recovery proceedings have been launched by both the SIU and Eskom.

“Eskom provided the first batch of dossiers of charges related to four former Eskom directors to the Companies and Intellectual Property Commission for consideration and prepared detailed evidence packs relating to all implicated directors. New contracts for all implicated suppliers are provisionally blocked while awaiting the outcome of related court cases where after relevant suppliers are formally blacklisted.

“Eskom’s state capture task team is focussing on the backlog of supplier disciplinary cases and addressing new cases as they arise,” it adds.

Investigations continue to reveal instances of improper contract management, general procurement irregularities and fraud.

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“Non-compliance with Eskom’s policies and procedures, employee dishonesty as well as circumvention of controls remain the most prevalent themes in these cases. A total of 278 (2022: 128) new cases involving employees and suppliers were registered for internal investigation during the year, with 227 (2022: 113) forensic investigations concluded during the year and 305 (2022: 253) cases under investigation at year end.

“Disciplinary action was recommended for 223 employees and 54 suppliers were recommended for review through the supplier review process. Confirmed cases of fraud and corruption registered with the South African Police Services (SAPS) amounted to 158 cases of which 10 are at trial stage at various magistrate and specialist commercial crimes courts,” according to Eskom, while bemoaning the fact that Eskom has again received a qualified audit opinion relating to the completeness and accuracy information required by legislation.

SA Post Office

The Post Office, which was successful in begging for a government bailout, also received an adverse audit outcome from the Auditor-General.

It indicated that financial control at the Post Office was so bad that it could not give an opinion on the financial statements at all.

Total irregular expenditure disclosed in the financial statements topped R2.4 billion, of which R1.8 billion was identified in previous years and R567 million in the last financial year.

Another R46 million of expenditure in the previous financial year was also found to flout regulations and classified as irregular spending.

Fruitless and wasteful expenditure exceeded R242 million in the year to March 2022 with another R537 million brought forward from prior years.

The solution is simple: SA Post Office just cleans the books by writing it off. It wrote of R499 million during the year.

The effect of bad financial management, and most probably corruption, is huge. Management says in the annual report that suppliers are not willing to work with the Post Office anymore because they are not getting paid.

“The revenue target of R4.8 billion has not been attained at R3 billion. The lower than projected revenue performance is due to the lingering effects of the Covid-19 lock down and the associated business impact, increased customer migration to digital alternatives and transaction volumes, together with the weak financial position of the SA Post Office and suppliers not having been paid, thus withdrawing services, further impacting revenue generation,” according to Post Office management.

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“The low revenues have further contributed to the non payment of trade, international and other payables, including accruals amounting to R4.4 billion. In addition to the above, a further amount of R2.8 billion is owed to Postbank,” it says.

The creditors awaiting payment include employees.

A salary debt of R150 million (for the period April 2020 to February 2021) was outstanding at the end of March 2022, as well as R928 million due to the South African Revenue Service, R769 million to the Post Office Retirement Fund, R645 million to the Medipos medical aid and R100 million to the UIF.

SAA

However, South African Airways (SAA) wins first prize for bad financial management.

It hasn’t published an annual report since the 2017 financial year, save for the report for the year to end March 2018, which was only published in 2022.

Irregular expenditure

The Auditor-General said after looking at the financial statements that SAA did not include all irregular expenditure incurred in the notes to the financial statements.

“As the SAA Group did not have adequate controls to maintain complete records of irregular expenditure, I was unable to determine the full extent of the irregular expenditure note as it was impracticable to do so,” he said.

“I was unable to confirm this by alternative means. Consequently, I was unable to determine whether any further adjustments were necessary to the irregular expenditure stated at R22 billion.”

Fruitless and wasteful expenditure

The Auditor-General had the same difficulty here too.

“As the SAA Group did not have adequate controls to maintain complete records of fruitless and wasteful expenditure, I was unable to determine the full extent the fruitless and wasteful expenditure note as it was impracticable to do so.

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“In addition, I was unable to obtain sufficient appropriate audit evidence to confirm the fruitless and wasteful expenditure incurred, as well as the amounts written off.

“Consequently, I was unable to determine whether any further adjustments were necessary to the fruitless and wasteful expenditure stated at R24,8 million in the consolidated and separate financial statements.”

Everybody

Everybody is in on the graft. Every annual report noted losses as a result of common criminals stealing equipment, wages, material and infrastructure, as well as vandalism, robbery and fraud.

It ranges from stealing signalling lights and railway tracks to electrical wires and robbing old women collecting their meagre government grant from the Post Office.

This article was republished from Moneyweb. Read the original here