To audit or not: The case of the “Development Account”

May 2014

Reputation promise/mission

The Auditor-General of South Africa has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, exists to strengthen ourcountry’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.

Table of contents

• Government responsibilities in managing extractive industry• What are the target minerals• Regions that are most active• Land ownership in South Africa – Categories of land• Two important categories of land – State land• Two important categories of land – Trust or Tribal land • Arrangements of Trust accounts in the North West provinces (D-Account)• Arrangements of Trust accounts in other provinces• Current Auditing requirement - Royalties and Trust Accounts• Limitations experienced by the SAI in auditing the Trust Accounts• Eight pillars defining the independence of SAIs• The Value and Benefits of Supreme Audit Institutions – making a

difference to the lives of citizens• Benefits of auditing Development account and Trust Accounts by SAI• Recommendations

Government responsibilities in managing extractive industry

• To design and implement fiscal policies and contractual terms for the development of a country’s natural resources to secure the greatest social and economic benefit for its people.

• To ensure establishment of proper accountability mechanisms by government to its citizens regarding natural resources management.

• Resource revenues should be used primarily to promote sustained, inclusive economic development through enabling and maintaining high levels of investment in the country.

What are the target minerals

Several minerals are mined in South Africa, including; • platinum met als, • manganese, • chrome, • vanadium,• gold, • coal, • diamonds, • iron ore, • copper, • nickel, • building materials and other non-metallic metals.

Regions that are most active

Mining occurs throughout South Africa, particularly in • Mpu malanga Province, • North West Province, • KwaZulu Natal Province, • Limpopo Province and • Northern Cape Province.

Land ownership in South Africa – Categories of land

• State land• Alienated State Land• Proclaimed land (Land held under claims)

• Trust or Tribal land• Private land

Two important categories of land – State land

• This is land in respect of which both the surface and minerals are owned by the State.

• Permission to utilise the land and minerals is obtainable from the state i.e. government gives mining rights to mining companies to extract minerals on state land and pay royalties to the state.

• Royalties are paid directly into the National Revenue Fund (in terms of the Minerals and Petroleum Development Resource Act (MPDRA), Act No 28 of 2002) and used for the benefit of the country as a whole.

Two important categories of land – Trust or Tribal land

• This is land where the land and, in most instances, the rights to the minerals were set aside for certain communities in the former homelands and self-governing territories.

• Past laws prevented black communities from negotiating directly with mining companies to exploit their minerals and the community had to operate through a trustee.

• This is a very complex form of ownership because the people on the land owned the mineral rights, but had no rights to enter into mineral lease agreements.

Two important categories of mined land – Trust or Tribal land (continued)

• Government gives mining rights to mining companies after they receive permission from the relevant authority within a rural or communal area to extract minerals on its land.

• In terms of the MPDRA, mining companies pay contractual royalties to communities whose land they mine.

• The royalties in this instance are not legislated but are based on a contractual agreement between communities and mining companies.

• Royalties are paid into trust accounts and used for the development of the community to which the royalties are paid.

Arrangements of Trust accounts in the North West provinces (D-Account)• The Development Account is an account inherited by the North West

Provincial Government from the former (Bantustan, Bophuthatswana Government formed by the previous regime).

• Royalties by mining companies are paid into trust accounts of different communities within the Development Account for the development of various communities.

• In terms of the provincial legislation (North West Traditional Leadership and Governance Act No. 2 OF 2005), the Premier of the province is the ultimate custodian of the account.

• The provincial government is responsible for collection of Royalties and disbursement of funds to the community in terms of the community budget submitted to the provincial government before the start of the financial year.

Arrangements of Trust accounts in other provinces

Northern Cape - mining companies together with the communities have established trust funds which are run by representatives of the communities and representatives of mining houses. The Trust Boards are the ones that administer the collection of revenue from mining companies and also consider mechanisms of disbursing the funds on behalf of the communities. In this instance, government does not have a direct involvement.

Free State - After 1994, the government introduced new-order mining rights, whilst the mining houses were paying royalties directly to government; there was also a requirement for each mine house to have a manager's fund that the community could access for approved community projects. In this instance, government also does not have a direct involvement.

Current Auditing requirement - Royalties and Trust Accounts

The National Revenue Fund • (where royalties from mining activities on state owned land is paid) is audited on

a yearly basis by the SAI. This is done in accordance with the Public Finance Management Act, 199

North West Development account• In terms of section 4(1)(f) of the Public Audit Act, Act No 24 of 2004, the Auditor-

General must audit and report on the accounts, financial statements and financial management of any other institution or accounting entity required by other national or by provincial legislation to be audited by the Auditor-General.

• Section 31 of the North West Traditional Leadership and Governance Act No. 2 OF 2005 requires the SA SAI to audit the Development account.

Other Trust accounts in the province• In absence of laws regulating royalties to be paid by mining companies for mining

activities on Trust or Tribal land, the SA SAI has no mandate to audit these Trust accounts.

Limitations experienced by the SAI in auditing the Trust Accounts

Limitations experienced by the SAI in auditing the Development Account• Clarity on the total extent of the tribal and trust accounts in the provinces is not

known. • Completeness of Royalty revenue from the mining houses in these accounts

cannot be confirmed.• Lack of clarity on what “maintaining of the books of account and supporting

information” entail i.e. if it means compiling set of Financial statements. • The applicable accounting framework and its relevance if financial statements are

required.• Absence of laws that regulates payments of royalties by mining companies to

communities of Trust or Tribal land. Currently, as indicated, royalties paid to communities are referred to in the MPDRA as contractual royalties and are not a legislative requirement. These royalties do not therefore fall in the category of tax or levies and cannot be classified as “public funds”

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The Value and Benefits of Supreme Audit Institutions – making a difference to the lives of citizens

Strengthening the accountability, integrity and

transparency of government and public entities

Demonstrating ongoing relevance

to citizens and other stakeholders

Supreme Audit Institutions making a difference to the

lives of citizens

Being model organisations

through leading by example

Benefits of auditing Development account and Trust Accounts by SAI

• Enhance public accountability• Increase confidence of communities in government and

those charged with governance over their monies.• Increase confidence of mining companies (continue

paying royalties if they know there is accountability and development of the poor communities)

• Growth in business through increased and continued investment.

• Fast-track development of communities depended on this fund for their development

Recommendations

Legislative intervention in all provinces to: • Regularise and standardise the practice of

payment of royalties by mining companies to communities of Tribal land (as opposed to royalties depending on contractual arrangements).

• Regulate financial management of the Trust/Tribal accounts

Questions

Direct contact details:

Deputy Auditor General: Tsakani Ratsela

012 426 8000Tsakanima@agsa.co.za

Senior manager: Nkhopotseng Hlasa

012 426 8071nkhopotsengh@agsa.co.za

www.agsa.co.za