Changes sought to the Public Finance Management Act for better accountability at SOEs

The Organisation Undoing Tax Abuse (Outa) wants the Public Finance Management Act (PFMA) to be changed so that “delinquent director” court applications could be brought against malfeasant accounting authorities of all state-owned entities (SOEs), including those that are not registered as companies. 

Outa, which filed its case at the Pretoria High Court, said this will enable civil society organisations to take such actions to hold individuals who mismanage and abuse SOEs accountable, adding that the law currently allows delinquent director actions against directors of registered companies, which excludes many SOEs. 

The Minister of Finance and Minister of Trade are cited as the first and second respondents, respectively. 

However, the spokespersons for both departments did not comment at the time of publication.

The SOEs that are not registered as companies in South Africa typically operate under their own founding legislation, which outline their structure and mandate, rather than being governed by the Companies Act 2008. These entities are subject to their specific establishing legislation, the PFMA and other relevant regulations.

Outa said this prevents their accounting authorities from being declared delinquent. 

The organisation believes this is unfair as it limits actions to hold SOE management to account, effectively holding SOE accounting authorities to lower standards than those of state-owned companies (SOCs). 

This came as Outa failed to take delinquency actions against the Services Sector Education and Training Authority (Services SETA) and the National Student Financial Aid Scheme (NSFAS).

The civil group previously exposed a Services SETA’s R36 million contract for branding material awarded at inflated prices, leading to a criminal complaint. The organisation found evidence of a contract worth R162m for equipment that was not delivered or was faulty, alongside payments of learner stipends to bogus businesses, amounting to fraud. Outa also uncovered a contract for a biometric attendance monitoring system worth R163m, finding that the tender process was not followed and public funds were lost. 

An investigation by the organisation also found a network of service providers and public servants facilitating looting at NSFAS through irregular tender processes. The financial scheme awarded contracts to service providers without the necessary banking licences to manage student allowances, and did so at excessive rates.

Outa also reported that millions of rands were spent on irregular contracts awarded to service providers in close links with officials in the Department of Higher Education.

As a result, Outa filed criminal complaints against individuals involved, including Andile Nongogo, the former CEO of Services SETA and NSFAS. 

“If Services SETA and NSFAS were SOCs, the public (and OUTA) would have recourse under the Companies Act, but under the PFMA, the public has none,” said Advocate Stefanie Fick, Outa’s executive director of the accountability division.

Nongogo denied the allegations against him, stating that they were unfounded. Despite his denial and an attempt to challenge his dismissal, he was fired from his position as NSFAS CEO.

This was after he took NSFAS to court, arguing that the board illegally terminated his employment based on an investigation report without providing him the proper opportunity to challenge the findings at a disciplinary hearing. However, the court later found his dismissal to be lawful.

In May 2020, Outa won a high court order which declared former and the late South African Airways (SAA) chair Dudu Myeni, a delinquent director for life due to her alleged repeated misconduct, dishonesty and gross negligence. The court found that Myeni breached her fiduciary duties and inflicted “irreparable" harm to SAA and the country.

Outa said this action was possible because SAA is a registered company, which falls under the Companies Act. 

The organisation recently filed a delinquency case against the former Joburg Property Company CEO, Helen Botes, over her failures that contributed to the fatal Usindiso fire and her role in Covid-19 procurement scandals.  

However, Botes announced that she would challenge the application and claims made against her.

In its application, Outa is asking the court to declare sections 83(4) and 84 of the PFMA unconstitutional, adding that they impose a lower standard of accountability on the boards of the SOEs which are not registered as companies, compared to SOCs. 

The organisation wants the court to allow Parliament two years to amend the PFMA.

“However, pending that legal fix, OUTA asks the court to order that section 162 of the Companies Act (which enables delinquency actions) applies to all accounting authorities of all public entities, regardless of whether they are registered as companies. If Parliament fails to fix the law within two years, then OUTA asks for the interim application of the Companies Act to continue to apply,” it said.

Section 83(4) of the PFMA provides that financial misconduct may be grounds for dismissal or suspension, or other sanction. Section 84 provides for the applicable legal regime for disciplinary proceedings. 

“The only sanctions for financial misconduct are dismissal, suspension, or undefined sanctioning.”

“Under section 162 of the Companies Act, a court must (the court has no discretion) declare a company director delinquent if the director has failed to discharge a director’s duties under the Companies Act,” said Fick in her affidavit.

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