Media statement by Minister Thulas Nxesi on anti-fraud and corruption activities at Public Works

29 Sep 2014

Acting DG, Mr. Clive Mtshisa,
Chief Financial Officer, Mr. Cox Mokgoro,
Legal Advisor to the Minister, Mr Phillip Masilo,
Government officials,
Members of the Media.

Good morning.

Let me summarise in headline form what I want to report on today: The Public Works turnaround has uncovered R34.9 billion irregular expenditure, some of which goes back as far as 2001.  R1,1 billion of this is being investigated for fraud and corruption. We have strengthened accountability through implementing appropriate systems and structures to prevent any future transgressions.

Our turn-around interventions are beginning to yield the desired results and this is reflected in the latest Annual Report that the department will be tabling in Parliament tomorrow.

Without anticipating the contents of the Annual Report, the briefing this morning will show how the department is winning the war against maladministration, poor performance and issues of fraud and corruption.

This is demonstrated by our resolve to deal with the historical burden of irregular expenditure. Our investigations have uncovered R34.9 billion in irregular expenditure which has accumulated over a long period - in some cases going back as far as 2001.

Property Management Trading Entity (PMTE)

Recently I met with, and briefed the media on the Cabinet's endorsement of our business case to establish and operationalize the Property Management Trading Entity (PMTE) to ring-fence and professionally and optimally manage the extensive property portfolio of the state on behalf of the people of South Africa. Indeed our asset portfolio is part of our heritage as a country. In the recent past, we have worked briskly to update the Cabinet on our efforts to firstly stabilize and transform the department, eradicate fraud and corruption, but also to professionalize the manner in which the department conducts its core business by institutionalizing the PMTE.

Currently, the PMTE is a government component within the department reporting to the Director-General and the Minister - with no costly Boards or Agencies in place. It operates as a special vehicle, formulating and adopting internationally accepted management and accounting norms and standards in the management of the state's immovable assets.

In fact more than 70% of the business of the department is related to property management and historically this is the area that has been poorly managed. One of the first areas of intervention that we prioritised as part of the Turnaround was to stabilise the finance and supply chain management functions. I am glad to report today that these functions have been substantially stabilised, enabling us to further improve efficiencies in line function operations.

Irregular Expenditure

Without anticipating the outcomes of the Departmental Annual Report which is due for tabling in Parliament tomorrow, we have begun to experience some of the positive contributions brought by the existence of the PMTE - particularly in the area of irregular expenditure which, in the past, contributed to both the Department and the PMTE incurring successive adverse audits in the form of disclaimers.

Since 2009/2010, the Auditor-General has qualified the disclosure of irregular expenditure in the PMTE and the Main Vote (DPW) because it could not be confirmed to be complete and accurate.  The response of my finance stabilisation team was to undertake the massive task of reviewing all transactions from 2009/10 until the present.

The findings are at the heart of today's briefing. The value of irregular expenditure that is reported in the annual financial statements of both the Main Vote (DPW) and PMTE has increased substantially to a combined figure of R34.9 billion. In a word: shocking.

However, I need to make it very clear that this does NOT represent transactions processed in a single year. It is actually the cumulative result of transactions processed over five years - some of which have their origins further back, as early as 2001. This is because the transactions initiated prior to the five-year period that resulted in payments during the extended period under review were also included in the statistics reflected by the review process.

The reasons for the escalation of irregular expenditure are the following:

• Firstly, I have already indicated that the period under review goes back many years. Approximately 1, 3 million transactions were reviewed in detail. It is, therefore, a cumulative total covering many years that has now for the first time been detected and disclosed.
• Furthermore, the Turnaround interventions and the adoption of GRAP accounting standards in PMTE necessitated that irregular expenditure relating to the execution of infrastructure projects on behalf of client departments be disclosed by PMTE. In the past, the client departments were responsible for disclosing the information.
• There is ample technical and ethical justification for this adjusted accounting policy that the PMTE adopted. In this regard consideration was given as to whether the PMTE is acting as an agent on behalf of user departments, or, as a principal in its own right. Because decision making ability, accountability, credit risk and value added processes rest with the PMTE, we concluded that the PMTE acted as a principal in its own right, and not an agent, and can therefore not expect user departments to take accountability for such transgressions. This was also in line with National Treasury directives that due consideration should focus on who actually received goods and services when transgressions occur.

As a result of the above comprehensive review undertaken over the five years and the revised method of disclosure of irregular expenditure to include user departments' funds, the total amount of irregular expenditure the department has to disclose increased significantly to R34.9 billion.

Similarly, it is important to understand the meaning of an irregular expenditure transaction and how it attracts this label. Irregular expenditure is incurred when any technical requirement contained in any applicable legislation is not followed. This can include:

• The Public Finance Management Act (PFMA);
• Treasury Regulations;
• Treasury Instructions issued in terms of section 76 of the PFMA; or
• Any policies or procedures that have been issued by the Department in terms of the PFMA or any other applicable legislation.

From the above, you will note that the origin of irregular expenditure can be at a very low and detailed level of implementation.

It is crucial to understand that an irregular transaction does not necessarily mean that fraud has been committed. It also does not mean that it represents money lost or wasted. The Department may have obtained value through such transactions although some technical discrepancies occurred during the procurement or payment process.

Some of the incident types that gave rise to the irregular expenditure were the following:

• Incomplete Documentation: procurement documentation not completed (missing supporting documentation, documents not signed, no original tax clearance certificates, etc.)
• Incorrectly Approved: Where signed documents did not meet the required levels of authority or signatures of delegated officials
• No Competitive Bidding Process: Where tenders were not advertised for the full 21 days, negotiated procedures followed for procurement of contracts, or minimum number of quotations were not received
• Other: which includes: emergency procurement for non-emergency situations, incorrect calculations, lowest quote not selected, etc.

I will now provide a brief overview of the years in which the irregular expenditure was incurred and indicate how it has reduced since the turnaround initiative has been implemented.

It should be noted that there is already a significant decrease in the value of irregular transactions throughout the five year period:

• 2009/10 and prior years makes up 65% of the total Irregular expenditure
• 2010/2011 makes up some 14%
• 2011/2012 makes up 11%
• 2012/2013 makes up 8%
• Finally 2013/2014 has reduced to only 2% of the total Irregular expenditure disclosed (This was due to the day to day unplanned maintenance of our buildings.)

In terms of National Treasury policy requirements each and every one of these instances of irregular expenditure will now need to be fully investigated and accountability determined. This process has already commenced.

I am also fully aware of the fact that there may be transactions identified through this intervention that may be the result of suspicious practices. My team has already identified transactions to the value of approximately R1.1 billion that have been referred to the Special Investigations Unit ("SIU") as well as the Department's Fraud Awareness and Investigations Unit.  This amount forms part of the R34.9 billion.

In the meantime, the department has also bolstered its own internal first-line of investigative capacity to ensure that this all-important task is completed expeditiously in the new financial year.

I can also give you the assurance that appropriate action will be taken against perpetrators where there are found to be reasonable grounds for it.  We have repeatedly mentioned that fraud, corruption and maladministration have no place in the Public Works we are seeking to rebuild.

Fraud and Corruption

As the efforts to rebuild the Department of Public of Works start yielding fruit, the campaign to eliminate fraud and corruption from DPW ranks continues in earnest.

So far, since 2009 more than 100 cases of fraud and corruption involving more than R1.1 billion have either been finalised or are being investigated.

Several people, including former DPW senior officials, will appear in court to face charges arising from misconduct and corruption. The department has also launched several civil cases in a bid to recoup the allegedly ill-gotten funds.

The intensification of the campaign against fraud and corruption in the department takes place against the backdrop of the Turnaround Strategy that we adopted in January 2012. Since then six officials have been sacked for various misconduct offences.

A breakdown of the cases investigated includes the following:

• In 2009/2010, 14 cases
• In 2010/2011, 4 cases
• 2011/2012, there were 15 cases
• 2012/2013, there were 5 cases

• In this current financial year, about 15 cases are being investigated including the Nkandla investigation by the SIU.

Other investigations that are being carried out by the Special Investigating Unit include the following:

• An energy company that was paid R32-million for services that it did not render.
• 13 companies being investigated for transgressions ranging from procurement process not being followed to incorrect supplier being appointed.
• 23 companies being investigated.  This includes 15 companies being investigated in connection with procurement irregularities arising from the Nkandla security upgrade.

Most of these investigations have been finalised and appropriate action will be implemented.

Criminal Cases:

• An official at the Pretoria Regional Office, Mrs Keneilwe Matlodi, is facing criminal charges in the Commercial Crimes Court after allegedly soliciting a R600, 000 bribe from a service provider. The official is also facing an internal disciplinary hearing.
• In March 2015 (next year), a former DPW employee Mr Desmond Simamane and property magnate Sayeed Hoosen Mia will appear in the Johannesburg Regional court for the start of their criminal trial. They face corruption charges emanating from when Mr Thabo Moagi worked at the DPW. Mr Moagi has been dismissed after an internal hearing.
• The department laid criminal charges against Mr Roux Shabangu and Mr Van Niekerk for allegedly benefiting in a fraudulent lease
• The department has laid criminal charges against a dismissed former official, Noloyiso Ntwana, who was found guilty in a disciplinary hearing in connection with R63-million spent in the renovation of Ministerial houses in Pretoria.
• The department has laid criminal charges against former Director of Property Management Mr. Vusi Mashiyane and former Deputy Director Ms. Bella Tlolane.

Civil Cases:

• Majestic Pty Ltd Roux Shabangu and Van Niekerk: The department has filed application to nullify the lease deal with Roux Shabangu on the grounds of fraud and collusion. The matter is to be heard in the North Gauteng High Court in November 2014.
• Skilpadhek Border Post: This is a matter where the department instituted legal proceedings to recover the amount of R50 million from the service provider and the former Acting Director General Mr Solly Malebye. The matter will be heard in November 2014 at the High Court in Johannesburg.
• Messr Mia, Moagi and Simamane: The department has issued summons in the South High Court to recover the amount of R8 million from Mr Hussain Mia, Mr Desmond Simamane and Mr Thabo Moagi. The matter is still pending.

In conclusion, we remain convinced that the creation of a fully-functional PMTE - located within the department - is at the centre of our turn-around strategy and that such an intervention will be pivotal to driving enhanced delivery of the department's mandate across its property and immovable asset base.

Issues of procurement are central to the business of the organization and as a result the systems and processes overhaul within the supply chain management will continue to drive our vision of transforming the department. New and sector-specific procurement regimes will be required to strengthen control for the varied and discrete areas of our business.

At the same time, the establishment of a fully-fledged Governance, Risk and Compliance Branch within DPW, we believe, will provide a structured approach to deal with risk and compliance issues while integrating governance, planning, risk management, service delivery improvement and monitoring and evaluation - all strengthening control and improving service to clients and the public.

I thank you!

Statement issued by the Department of Public Works, September 29 2014

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