ANNUAL REPORT 2011 – PRESENTATION TO SCER, 29 FEB 2012

National Student Financial Aid Scheme

Overview

NSFAS Annual Report 2011

Chairperson’s Report

Board Report

Board Committee Reports

Annual Financial Statements

Annual Performance Report

Way forward - 2012

2011

Chairperson’s report

2010 was a challenging year for NSFAS

• Auditor-General issued Disclaimer of Opinion• Board members resigned• New members were appointed with a mandate

to:

– Develop and implement a turnaround strategy

– Maintain NSFAS functions while implementing turnaround

– Address 2010 Disclaimer of Opinion by the Auditor-General• Achieved an unqualified audit in 2011

2011

Board Report - background & governance

NSFAS is a public entity which has 7 functions:

• to develop criteria and conditions for the granting of loans and bursaries to eligible students in consultation with the Minister

• to raise funds • to allocate funds for loans and bursaries to eligible

students• to recover loans• to maintain and analyse a database and undertake

research for the better utilisation of financial resources

• to advise the Minister on matters relating to student financial aid

• to perform other functions assigned to it by the NSFAS Act (56 0f 1999) or by the Minister

2011

Board – composition & committeesBoard - 13 appointed members, 4 co-

opted• Executive, Finance Committees

October 2010 - Minister assessed board performance and identified challenges

December 2010 – 5 resigned, 6 remained, 3 co-opted

2011 – DHET completed process to fill 8 vacancies

2011

Board Report – management

• Chief Executive Officer– Jan 2011 – probation extended– Feb 2011 – suspended – April 2011 – employment not confirmed

after probation, contract terminated

• Executive, senior management– Number of vacancies – being filled in

2011– Capacity challenges

2011

Executive Committee

Executive Committee (Exco)– Board chairperson - Zamayedwa

Sogayise – DHET representative - Shai Makgoba– 3 other members

Exco functions determined by the board in terms

of s10 of NSFAS Act:• To develop and implement a turnaround

strategy– conduct a due diligence of the entity, its risks,

commitments and resourcing needs

2011

Audit & Risk Committee

Chairperson – Stephen Smith

• Auditor-General Report (p45)– NSFAS moved from the Audit Disclaimer

of 2010 to an Unqualified Audit in 2011

• AG concurred on involvement of board in turnaround – “Although this might have increased the risk of loss

of independence of the Audit Committee, the interventions were sound…”

- AG Management Letter, 2011

2011

From disclaimer to unqualified audit - background

In 2010 the A-G disclaimed an opinion on 5

grounds:• NSFAS did not value the loan book at “Fair

value at initial recognition” in terms of IAS 39 • did not correctly account for interest over

the life of the loan in terms of GRAP 9; only started accruing for interest on repayment

• was unable to justify on verifiable scientific grounds how we impaired the debtors. In addition, NSFAS wrote off R589m of interest and could not properly justify this

2011

From disclaimer to unqualified audit – background (cont)

• Interest was incorrectly calculated on the system by R181m due to adjustments made without proper control

• There was a reconciling difference of R42m which could not be explained

For these reasons the auditors had doubts about the accuracy of student loan balances in LMS. They had sufficient doubt about the valuation of the loan book for them to disclaim an audit opinion.

2011

2011 year end interventions

To address the 2010 audit disclaimer, a number of key interventions wereimplemented:

• Reconstituted Board, Executive Committee• Changing gear from 3 year to 1 year

compliance• CEO contract terminated• Secondment of resources to Finance

Department• Actuarial valuation of loan book• Completion of loan book amortisation• Independent data verification of loan book• Procurement review

2011

Actuarial valuation of loan book

• We ran every transaction in the loan book to properly allocate all repayments, taking into account the in duplum rule – this was the first time NSFAS had ever

had accurate data at an individual loan level;

– Involved:• over 180 million lines of transactions• approximately 810 000 debtors and • 1,6 million loans

– The model took 5 days to run;

2011

Actuarial valuation (cont)

• Actuaries ran the data through a model which accounted for all the reasons for differences in loan values

• Throughout the process we ensured that our auditors and their own actuaries were part of the process

• Credit balances totalling R77,8m came to light for the first time ever – Refunding 34 000 students who overpaid– Full provision made for this in 2011

2011

Audit findings

• Board did not exercise adequate oversight– Appointment of service providers too late– Technical aspects not started timeously,

resulted in actuarial errors that needed to be corrected (misstatements)

– SCM failure resulting in irregular expenditure• Management

– Accounting Officer did not take steps to address irregular expenditure

– No proper guidance, training to staff on SCM– Human resource vacancies (15% to 18%)

2011

Irregular expenditure – R25,6m in 2010

• Opening balance R25 348• SABC 6 083• Vincent House Lease 1 296• Systems Link Cape (Pty) Ltd 2 726• Business Connexion (Pty) Ltd 2 101• *Lithotec Afric Mail Cape (Pty) Ltd 1 664• *Metrofile (Pty) Ltd 982• *Rennies Travel (Pty) Ltd 1 791• *SA Post Office 3 163• Other irregular expenditure 7 019• Less: amounts condoned ( 1 186)• Total 50 987

* Suppliers not rotated

2011

Irregular expenditure - remedial procedures

• Disciplinary hearings of all management involved in procurement process underway

• Independent adjudication • Appointment of SCM officer• Automation of purchase order system• Condonation of valid expenditure• Audit of potential fruitless and wasteful

expenditure

2011

Information technology

• No Chief Information Officer• No formal IT governance• No formal IT project or risk management

framework• No formally approved Disaster Recovery and

Business Continuity Planning

• Remedial action - policies, plans, resourcing as part of turnaround

2011

Investigations

• Forensic audit completed into conduct of one employee– Misrepresentation to third parties– Employee suspended– Disciplinary hearing 19,20 October 2011

No financial harm to NSFAS

2011

Annual Financial Statements

The Annual Financial Statements (p45) show in detail

what NSFAS does and how it fulfils its mandate

Some highlights are:

• In 2010, NSFAS distributed financial aid of R3.7 billion to 210 576 students - 17% more than 2009

• Since NSFAS started, R19 bn disbursed - in 2011, R5,5 bn will be distributed in loans and bursaries

• Students who pass get 40% of loan converted to bursary - cost R1.85 bn last year, 15% of loan book

2011

AFS -Balance Sheet (p60)

• Investments and bank R791 m (Inv R541m, Cash R213m, Inv current R37m)

• Prepayments R298 m• Student loans R5,03 bn (Current R421m, Non

current R4614m) - (LMS R12,2bn)• Fixed assets R12.8 m (PPE R8,6m;

Intangibles R4,2m)• Payables R53,2 m• Credit balances due to debtors R77,8m

2011

Expenditure

• Operational expenses were R57 million• Salaries R23.8 m – 41,5%• Audit = R6.3 m – 11%• Communications = R6,4 m• Rent = R930k• Metrofile = R952 k• Recruitment = R1,7 m• Postage = R2,8 m• Stationery = R1,7 m• Phone = R1 m

2011

AFS – Why doesn’t NSFAS recover what it lends?

• Monthly statement run is around R12,2 bn• This balance sheet reflects R5,2 bn• From books to balance sheet there is a difference

of R7bn– In 2011, for the first time ever, NSFAS can

substantiate this figure to A-G’s satisfaction

• NSFAS is good at administering outstanding loans – charged R536 m in interest last year

• But is not good at recovering loans – LMS R12,2 bn but only recovered R638 m –

5%

2011

Reasons for loan decreases

1 We don’t know IF the debtor will pay• Over 20 years there is a pattern of how

many do start paying – below earnings threshold, we don’t find them, informal employment

2 We don’t know WHEN the debtor will pay• It depends on when they exit, if they find

employment, what their level of earnings is and whether we can keep track of them

3 Time Value of Money• If we loan R10 000 now and only receive it

back in 3 years’ time, the real value in today’s terms is not R10 000

2011

Reasons for loan decreases (cont)

2011

4 Differential interest rates• We only charge 80% of repo as interest

(currently 4.4%) but discount to present value at 8.5%. The difference between these two interest rates reduces the value if the loan; also limited by “in duplum” rule

5 Death and disability• We factor in actuarial estimates re death

and disability6 Bursary conversion

• We write off of up to 40% depending on student’s academic success

7 The cut off point is 10 years • If debtors haven’t started paying within

10 years we fully impair the loan

Finance Committee

Finance Committee Chairperson – Nathan Johnstone

Functions • Advises the board on the financial management

of NSFAS, including:– Raising funds– Loan recovery– Investment of repayments

• Monitors and reports on performance quarterly, annually

2011

Annual Performance Report (p23)

Strategic Goals 1 Expanding the pool of funds available for

disbursement as student loans and bursaries

2 Effectively managing the institutional utilisation of funds administered

3 Strengthening internal efficiencies in the processing of student awards/claims to ensure that funding reaches target population

2011

Strategic Goals (cont)

4 Strengthening the quality of internal management and operations inline with changing funding patterns

5 Effectively communicating the relationship with all NSFAS stakeholder groups and targeted audiences

6 Undertaking research that informs the effective

utilisation of available funds and serves to advise the Minister of matters related to student financial aid

2011

Way forward

• Comprehensive policies and plans are being developed to improve operational efficiency and lay the foundation for a smooth transition to new, student-centred systems: – IT infrastructure, systems and operations,

including acquisition and implementation of a new Loan Management System

– Loans and bursaries administration– Finance– Credit Management, including debt recovery– Audit and risk management– HR management– Communications

2011