IDZ shrugs off damning PwC report
As much as R9.9-million was lost to irregular expenditure at the East London industrial development zone (ELIDZ) with the full know-ledge of senior managers, but no one will own up to it, according to a draft report by auditing firm PwC.
After nearly 18 months, and despite its damning findings, the draft report finally emerged this week after it was leaked to the Mail & Guardian.
It recommends that an investigation be conducted into how the entity approved R9.9-million in irregular expenditure, and paints a grim picture of the IDZ’s finances.
The IDZ was meant to be a hub for the creation for emerging businesses and jobs in the underdeveloped Eastern Cape. Instead, the IDZ was on the brink of not being able to pay salaries and creditors, and had spent millions acquiring and developing property outside of its zone boundaries, the report said.
The IDZ denied the claims, saying PwC had itself conceded that the report was wrong and that another report, by auditing firm Deloitte, had found differently and absolved it of liability.
But the IDZ refused to show the M&G the Deloitte report and instead referred to a 2016 investigation by the auditor general, who could not find any material noncompliance with legislation.
The October 2015 PwC report was commissioned by the Eastern Cape’s economic development department after media leaks claimed the IDZ did not have enough money to pay its staff, salaries and creditors.
The report was not published and its recommendations were never implemented. Its status remains “draft”, despite a cover letter stating it is PwC’s final report.
PwC auditors found “the ELIDZ did not have an approved irregular expenditure policy in place prior to 29 October 2014 [and] condoned R9.9-million in irregular expenditure during the [2012-2014] period”.
“We were unable to determine the identity of the approver(s) of the above-mentioned condonation as no supporting evidence could be provided to us ...,” the report reads.
This is in violation of the Public Finance Management Act (PFMA), which requires approval of irregular expenditure from the treasury. PwC recommended that the department conduct a “further investigation … in respect of the irregular expenditure and … interview the CEO and chairman of the ELIDZ board on the processes followed”.
The report appears to be backed up by the IDZ’s annual reports. The 2013-2014 report acknowledges R5.7-million in irregular expenditure and the following year’s report said R3.3-million was spent without due process.
“This was as a result of noncompliance with supply chain management policies, the PFMA and the treasury regulations,” IDZ said in its 2014 report.
PwC also found that about R906 000 in fruitless and wasteful expenditure between 2012 and 2014 was never investigated. “There are no reports or evidence of investigations relating to how such irregular expenditure was incurred and who was responsible for such expenditure,” the report reads.
There have been moves to discredit the report and its content, with claims by the IDZ that PwC itself conceded to legal errors and factual discrepancies.
“On the irregular expenditure, the CEO and chairman were interviewed and the PwC auditors conceded that their allegations were misinformed,” a senior source in the IDZ said this week.
“The reason the report was never made final is because it would have exposed the huge inaccuracies by the PwC. We actually received opinion from an advocate of the high court that confirmed that PwC got it wrong. They buried it themselves,” another senior IDZ source said.
The auditing firm refused to answer any questions about its investigation.
IDZ spokesperson Ayanda Ramncwana said this week: “We would hope that the Mail & Guardian and its readership would trust the findings of the auditor general more than those of a three-year-old, outdated, unverified and ill-informed draft report.”
Ramncwana was referring to an investigation by the auditor general in June last year into whether the public entity had complied with financial management legislation.
“I did not identify any instances of material noncompliance with specific matters in key legislation, as set out in the general notice issued in terms of the Public Audit Act,” attorney general Kimi Makwetu wrote in his audit opinion. Regarding internal controls that relate to good governance, Makwetu “did not identify any significant deficiencies in internal control”.
But the IDZ’s former chief financial officer, Babalwa Magongwa, said the dire financial state of the IDZ was immediately apparent when she was appointed to the position in November 2014. She has taken the IDZ to court for unfair dismissal and breach of contract.
“In the first two weeks of my employment, I could see there was no cash and we wouldn’t have money to pay salaries and suppliers,” she said. “The first thing I did was to inform the CEO of this and asked for a forensic investigation. I never got a response. I informed the board as well and received no response.”
Instead, she was stripped of her powers, she says.
In March 2015, the IDZ’s chief executive, Simphiwe Kondlo, revoked Magongwa’s delegating authority and set up a task team to run the IDZ’s finances. In May, Magongwa issued a summons for breach of contract and initiated proceedings in the high court in East London.
“I suggested [to Kondlo] that I inform the treasury and [economic development] MEC. The staff rallied around the CEO and made life unbearable and took away all my delegated functions,” Magongwa said.
In July 2015, she was fired — after a disciplinary hearing, which she claims not to have attended, although the IDZ insists she co-operated with it — for leaking information to the press.
She has demanded R6-million based on what she would have earned if she had served out the remainder of her contract, which was due to end in 2019.
“I went to see the premier [Phumulo Masualle] and I knew the CEO was telling the premier lies about the IDZ’s financial position. I told everything. In response, the premier asked the MEC to commission the independent investigation,” Magongwa claimed.
The premier’s office confirmed the meeting between Masualle and Magongwa in May 2015. But Masualle’s spokesperson, Sonwabo Mabanga, passed the buck to the MEC of economic development, Sakhumzi Somyo, and said: “Insofar as alleged improprieties [are concerned], we felt that there is some unfairness on the premier because the MEC concerned was seized with the issue”.
Somyo’s office said it could not comment on the report because it was a draft and therefore never published. He declined to comment on Magongwa’s dismissal because the matter is before the courts.
Magongwa is now fighting to have the PwC report admitted as evidence to support her claims that her decision to blow the whistle on fiscal mismanagement caused her dismissal.
But the IDZ has not only dismissed the allegations by PwC, it also describes the East London entity as one of the best development zones in the country.
“It must be noted that the ELIDZ continues to be one of the leading IDZ’s in the country. We continue attracting strategic investments that have had a tremendous impact on our region,” Ramncwana said.
Magongwa is due back in court on March 24.
How is buying a golf course tied to industrial development?
The October 2015 draft report by PwC on the East London industrial development zone (IDZ) is being disputed, with the audit firm alleging finances were mismanaged and the IDZ claiming PwC got it wrong.
At the behest of the economic development department, the auditors investigated alleged wasteful expenditure, disregard for due process and attempts to cover it up.
In the end, it is claimed, the IDZ proposed freezing salaries and bonuses — and even the illegal sale of land — to make up for the revenue shortfall. The report was never finalised or published, nor were its recommendations implemented.
Here are some of its most damning findings:
‘Looting’ of maintenance fund
The IDZ was in such a precarious financial position that it had to use R30.5‑million meant for maintaining its infrastructure to cover operational costs such as salaries and paying creditors in July, August and October 2014.
The PwC auditors confronted chief executive Simphiwe Kondlo’s team about this but reported that: “Although requested, we have not been provided [with] the rules of the fund or the specific approvals to utilise such funds for operational expenditure.”
The maintenance fund was set up with the board’s approval with an initial R20.6-million. But when withdrawals were made, there was no authorisation from any of the directors to do so. The fund was used when the IDZ needed to replace infrastructure such as transformers.
Verified correspondence shows that the fund contained R30.58‑million.
Alexander golf course
One of the report’s most serious findings related to the IDZ’s property portfolio: it had allegedly been buying property outside its permitted zone. This would qualify as wasteful expenditure because the IDZ was not able to use the property for its intended purpose.
The auditors cite the purchase of the Alexander golf course for R10.5‑million in 2003 as the most outrageous acquisition, and a glaring example of mismanagement. The golf course is adjacent to the IDZ head office in West Bank.
The findings reveal that the IDZ could not provide supply chain documentation for the purchase, and it was unclear where the funds to buy the property had come from. The current rental on the golf course is less than R4 000 a month.
As part of its rental agreement with Africa Sports Holdings, a company owned by former SAA chief executive Khaya Ngqula, the IDZ is supposed to receive 10% of the golf course’s audited revenue. According to PwC, not only was this never paid but the IDZ also never invoiced Africa Sports Holdings for the money.
To remedy this, auditors recommended a forensic investigation into the acquisition, finding the documents related to the deal, the reassessment of its relevance to the IDZ portfolio and the enforcement of the lease agreements.
In a letter from the IDZ’s legal adviser, Matthew Bell, to the IDZ on January 5 2015, it emerges that African Sports Holdings failed to present audited financial statements for the golf course.
Bell confirms meeting Ngqula and contemplating legal action against the company for failing to adhere to its lease agreement with the IDZ. “I am not comfortable with his broad statements regarding the delivery of audited financial statements; however, I am happy that he is willing to make an interim payment,” the letter reads.
The payment relates to the 10% of annual revenue due from the golf course, backdated to 2003. By March 2015, Ngqula’s company still had not presented financial statements.
Kondlo’s office has dismissed the PwC report as being littered with inaccuracies and legal flaws. — Govan Whittles