/ 16 January 2015

UKZN books aren’t debt warmed up

Clean bill: Professor Malegapuru Makgoba denies that the KwaZulu-Natal university has financial baggage.
Former Eskom chairperson Malegapuru Makgoba on Wednesday said it was Public Enterprises Minister Pravin Gordhan’s idea that the state-owned entity should conduct intelligence gathering to combat corruption.

Initial media reports late last year indicated that the University of KwaZulu-Natal (UKZN) had gone on a spending spree and incurred a debt of R2-billion in one year.

We were confused because we could not relate this to any specific factors in the university’s finances for the following reasons:

• Given that our revenue is just over R3.5-billion a year, such a debt would imply that we had expenses of more than R5.5-billion in one year. You would probably have to increase staff salaries alone by 100%, among other things, to achieve such a huge debt. Also, the university’s cash balances would have decreased substantially or would even have resulted in an overdraft. Amounts owing to creditors would also have increased significantly. And so we dismissed this interpretation.

• We then thought perhaps this had something to do with long-term liabilities, namely, our post-retirement medical aid obligations and loans from the Development Bank of Southern Africa (DBSA). However, considering that these (noncurrent) liabilities decreased by R22-million compared with 2013, we had to look for other possible reasons.

There was media mention even of the university owing “debtors” an amount of R2-billion. We understood this to be incorrect terminology because it is creditors whom you would owe. In our case, owing debtors R2-billion would imply that our students had overpaid their fees by R2-billion. This is certainly not the case – it is a struggle to collect some of our fees.

Ultimately, the department of higher education and training pointed us to a written parliamentary question that referred to a “deficit” of R1.874-billion. In our view, this was yet another case of incorrect terminology: that is, the parliamentary question used the terms “debt” and “deficit” interchangeably, and we presumed that the amount of R2-billion arose because the question rounded off R1.874-billion to the nearest billion.

R353-million vs R1.875-billion
In November last year, the department asked UKZN to respond to Parliament’s request that the university submit details of its financial audits in 2010/2011 and 2012/2013. Included in the submissions our chief financial officer made were findings of our auditors about various financial reports. A part of his submissions included an extract from UKZN’s external auditors’ report, which referred to an accumulated deficit of R1.875-billion.

In our December 2014 media statement, we explained that, in determining the overall balance of council-controlled funds (comprising primarily government grants and student fees), it is an incomplete and technically incorrect reading of UKZN’s 2013 annual report to call the R1.871-billion a deficit: R1.522-billion of this is explained by an increase in infrastructure spending (which the annual report specifies on page 97) and the difference between the two figures gives an accumulated net deficit of R353-million, as reflected in our balance sheet on page 94 of the annual report.

We understand that this arrangement was part of the government’s accounting disclosure requirement in the past: that is, to recognise that part of the income received from the government is used for providing infrastructure. It is also our understanding that some universities use this approach whereas others simply net off the two amounts so that they are easily identified in their annual reports.

It is important to note that, whether reference is made to R1.875-billion or R1.522-billion or the net deficit of R353-million, these are accumulated balances over a period of time, as can be seen on page 97 of our 2013 annual report. In 2004, the deficit in the council-controlled funds was R587-million, which in effect means that during this 10-year period the deficit decreased by R235-million. It is also for this reason that we indicated in our media statement our rejection of the suggestion that the “deficit or debt” of R2-billion had been accrued in merely one year.

R353-million and the post-retirement medical aid
Currently, UKZN pays about R450-million annually in medical aid to retired employees, and we have made these payments for years without fail. Every year, UKZN further incurs between R75-million and R90-million for staff who are still in our employment, but this is payable when they retire. Employees who joined the university after a certain period in 2004 do not qualify for this benefit. We charge the R75-million to R90-million increases to our income statement and this is why we indicate that the deficit is primarily because of this debt, which keeps on increasing.

In 2004, the amount UKZN owed in post-retirement medical aid obligations was R393-million and, as stated in the 2013 annual report’s financial statements, the balance by then was R1.034-billion.

Looked at differently, had the university been able to raise cash and then make offers to employees in 2014 (whether retired or still active), an additional liability of R481-million would not have arisen and, in effect, the university would be in a surplus position (that is, R641-million in savings compared with a deficit of R353-million).

Unlike some of the big universities, UKZN has never had huge reserves and endowments to absorb obligations such as this one, or even to build student residences, for that matter.

The university fully understands and accepts that it is not desirable that liabilities exceed assets (which is technical insolvency), but there are processes in place to ensure commercial solvency – that is, to ensure there is sufficient cash to meet its obligations annually and in the foreseeable future. We have adopted a pay-as-you-go approach to tackle the post-retirement medical aid obligation (this liability is payable over 50 years) and it will apply necessary actuarial models to reduce the liability.

Long-term debts
The university has two long-term liabilities – our post-retirement medical aid obligations and loans we owe the DBSA – and we use these to provide infrastructure.

UKZN received the first tranche of the DBSA loan in 2008 and is up to date with its repayment commitments: the university has never defaulted.

Auditors’ report
The Public Finance Management Act does not govern universities, but it is our understanding that the auditor general has been gradually introducing certain auditing and reporting practices that the Act’s principles underpin.

Our auditors first informed us, for our 2013 audit, that the auditor general had asked them to prepare very detailed audit reports (almost similar to the ones in the public sector). The expanded scope of the “audit opinion” on “going concern” paragraphs in our 2013 annual report, and of “internal controls”, reflects this new development and presumably can be verified with either the auditor general or our external auditors.

Our auditors’ findings on revenue recognition and monthly reconciliations are not shortcomings that arose only in 2013. Audits, whether external or internal, from time to time highlight shortcomings in the system at any given point, but it would certainly be incorrect and misleading to suggest that the deficit results from weaknesses in the internal control system.

The IT system UKZN uses is called the Integrated Tertiary System. It was designed for tertiary institutions and, in our experience, it is very strong on the academic side but requires much more development on the financial side. As a result, some processes are still done manually, and this is often a problem for an institution as big as UKZN.

The deficit and the committee
UKZN’s net deficit received media attention late last year. It is this deficit that forced us to increase student fees substantially, and it is also why the university decided to appoint an actuary to its finance committee, to deal with the challenge of our post-retirement medical aid obligations.

Effective from January?1 2013, the change in accounting rules resulted in losses stemming from our post-retirement medical aid obligations – ones that were previously not included in the balance sheet – now having to be included in full. In this regard, we processed more than R200-million in 2013-2014 (R191-million in 2013 and R18-million in 2014 under operating funds: see page?97 in our annual report).

We excluded this amount previously because the accounting rules allowed that, and we did so primarily to protect private sector institutions that would have suffered serious declines in their market values had the post-retirement obligation been taken into the balance sheet in its entirety.

The accounting rules prescribe that, where there is a change in accounting policy and, if it is a material one, the adjustments must be effected retrospectively. With the change in accounting policy you have to restate your previously reported figures, and this is why the December 2012 financials show a deficit of R135-million under council-controlled funds and the 2013 financials show a restated deficit of R345-million.

In summary
The university has not increased its long-term debts by R2-billion – if anything, its debts have decreased slightly.

The deficit for 2013 was R28-million, and UKZN’s auditors confirmed this. The accumulated deficit of R353-million (R1.52-billion subtracted from R1.875-billion) accrued over a period of time (as indicated by the term “accummulated”) and not only one year.

The recent major contributory factor to our deficit is specified in the balance sheet’s post-retirement medical aid obligation as more that R200-million, and is not an indication of an increase in the university’s spend.

Professor Malegapuru W Makgoba is vice-chancellor and principal of the University of KwaZulu-Natal and Bulelani Mahlangu is the university’s chief financial officer. This article is a minimally edited version of their reply on December 17 2014 to questions the Mail & Guardian emailed them the day before.