Prasa’s financial management out of control

Finance minister Tito Mboweni’s words from his 2019 budget speech should be ringing in our ears:

‘We must prune and pluck away at the rot until there is growth.’

Let’s consider the case of the Passenger Rail Agency of South Africa (Prasa). A new board was appointed after the March 2018 year end, and therefore cannot be held responsible for what happened before. However, it will be held responsible for cleaning up the mess – notably irregular, fruitless and wasteful expenditure of R25.2 billion (2017: R21.3 billion). It will also be held responsible for introducing a proper accounting system, asset register, and adequate risk and governance controls.

There was no consequence management in the year ended March 2018. Perhaps this new board will surprise us in this regard.

The board is committed to refocusing the organisation on its core objectives of providing an affordable, reliable and safe passenger service. New chair Khanyisile Kweyama admits to inheriting an organisation that is “almost broken and is fraught with a myriad of issues and challenges”, including allegations of maladministration and corruption, poor internal controls, and the slow rollout of its capital programme.

Read:

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The auditor-general’s report to parliament was signed on September 21, 2018. However, the annual report was only recently made available on its website.

AG’s report is dire

According to the report, there was no proper system in place to identify and disclose all irregular, fruitless and wasteful expenditure.

The group did not properly account for property, plant and equipment (PPE). The accounting records (including the fixed asset register) were inadequate. Some assets were not recorded, other assets could not be verified. This raises a question mark over the recorded value of the group’s PPE in the balance sheet of R40.5 billion, as well as the operating expenses of R10.4 billion.

The fare revenue of R1.2 billion cannot be verified as the fare revenue system was not fully operational from August 2017 to March 2018. Trade and other receivables could be overstated by R839 million, and impairment losses recognised could be understated by R839 million.

Losses

There is a material uncertainty relating to the going concern status of the group. It incurred a loss of R924 million (2017: loss of R927 million). Bear in mind that Prasa received an operational subsidy of R5.8 billion in the financial year.

While the group’s current assets exceed current liabilities by R7 billion, capital expenditure commitments will wipe out most of the cash reserves.

There is ongoing litigation in regard to the locomotive saga (see update below). In the meantime, the group has a material commitment of R66.6 billion relating to its fleet renewal programme.

For the period November 2016 to February 2018 the board of Prasa did not have a representative from National Treasury. This contravened Section 24 of the Legal Succession to the South African Transport Services Act.

In regard to the audit of the annual performance report, the auditor-general was generally “unable to obtain sufficient appropriate audit evidence for the various achievement targets”.

Non-compliance

The failures of governance just get worse and worse. The auditor-general reported that financial statements were not submitted for auditing within the required time limit, further, they were not prepared within the correct financial reporting framework, nor were they supported by full and proper records.

Strategic planning was not carried out within the required framework set out by Treasury regulations.

The Public Finance Management Act (PFMA) was contravened in a number of instances. The procedures to be followed to prevent irregular, fruitless and wasteful expenditure were not followed. There was non-compliance with supply chain management. Effective steps were not taken to collect all revenue due. Procurement and contract management had too many contraventions to list in this article.

Consequence management

Consequence management? According to paragraph 52 of the auditor-general’s audit report, there is none.

And paragraphs 59 to 61 are damning on the lack of leadership within the company, but also lay the blame at management’s door:

* “There was a slow response by senior management to reviewing and updating the information technology strategic documents and governing policies …”

* “The inadequate controls within the information technology environment over network access and security management contributed to the collapse in the internal control environment.”

Investigations

The rot within Prasa has been building for years. The Public Protector issued a report in August 2015 on allegations of financial mismanagement and tender irregularities that occurred between 2010 and 2012. The investigation is ongoing.

A forensic investigation was carried out on procurement matters arising out of the 2014/15 audit. The final report was issued on July 31, 2017, but little has changed.

National Treasury also instituted a forensic investigation, and this is still in progress.

Update on the tender awarded to rail leasing company

In 2016 the Johannesburg High Court ruled that the tender awarded to Swifambo Rail Leasing (SRL) be set aside and that R2.6 million be paid back to Prasa. On November 30 last year, the Supreme Court of Appeal (SCA) dismissed SRL’s appeal with costs, agreeing that “the High Court did not err in finding that Swifambo was a party to a fronting practice, and was not an innocent tenderer”. 

Post-budget 2019 woes

South African taxpayers have now been subjected to bracket creep, and the poor are worse off due to the so-called sin taxes, the knock-on impact of fuel levy increases, and last year’s Vat increase. This while state-owned enterprises (SOEs) continuously and flagrantly flout legislation and moral principles, and continue to rack up unsustainable levels of irregular, fruitless and wasteful expenditure.

The auditor-general is doing a sterling job in trying to audit these SOEs. It is time the state shareholder acted like one and demanded quarterly accounts in order to ascertain performance. Incompetent management should be replaced timeously, and not on an ad hoc basis with no consequence management. SOEs should also be required to submit a six-monthly report to parliament on ongoing litigation and the steps being taken to clean up their act.