Department of Correctional Services - Briefing on the outsourcing of services

Meeting report

Introductory remarks by the Chairperson
The Chairperson welcomed the delegation from the Department of Correctional Services. The purpose of the meeting was for the Committee to gain an understanding of the outsourcing practices of the Department.  He advised that the Committee would interact with the Department on a quarterly basis.  In particular, the Committee would consider the administrative functions of the Department in order to assist the Department to achieve an unqualified audit opinion. In previous meetings with representatives from the Department, the Committee had raised concerns about the extent of outsourcing of functions by the Department. The Department was requested to provide the Committee with a detailed explanation of the necessity for and likely duration of what the Committee considered to be excessive outsourcing.

The Chairperson said that his understanding of the situation was that when a Department did not have the required skills available internally, it went out and found people who could provide the service, but while they provided the service, they transferred skills to the organisation so that the organisation could become self sufficient. He expressed his opinion that the Department should not use expensive consultants indefinitely. The Committee and the Department were scheduled to meet again on the 18^th November 2009, which would be another opportunity to resolve any outstanding issues. The Committee would continuously bring to the attention of the Department any administrative matters that the Committee was uncomfortable with. The interaction between the Committee and the Department would occur on a quarterly basis and by the time the Auditor-General presented his report to Parliament, the Committee would not be surprised by any adverse findings.

Briefing by the Department of Correctional Services (DCS)
Ms J Schreiner, Acting National Commissioner; DCS, outlined the Department’s approach to outsourcing, the lessons that had been learned in terms of procurement processes, the critical issue of getting value for money and the element of risk involved in the process of outsourcing and co-sourcing. She explained that the Department made a very clear distinction between procurement for core and non-core business. The management of core business was a policy issue, which informed the Department’s approach to outsourcing. The Department was guided by the principle of not outsourcing core business. The Department had attempted to understand the difference between outsourcing, purchasing products or services and co-sourcing (i.e. where the DCS had some internal capacity, but needed additional capacity).

From time to time, the Department faced temporary staff shortages and required external expertise. Over the past 4 years, the Department had moved away from an ad-hoc approach to technology to an integrated strategy in respect of technology. The Department had considered the different elements of technology procurement and ensured that the Department moved consistently in the desired direction. In certain cases, the Department had required customised technology. In all the abovementioned situations, the Department ensured that skills were transferred. Feasibility studies would indicate the duration of each individual outsourcing contract and the particular skills that would be required.  The Department appreciated the importance of consistent improvement.

The Department had realised that, the better the long term planning was and the more integrated the plans were, the better the procurement of goods and services could be moulded to the requirements. The Department was able to be more specific, more comprehensive and clearer about time frames. The procurement process was being mapped.

Cost-benefit analyses determined whether the Department received value for money when outsourcing.  The degree of risk associated with outsourcing and co-sourcing had to be determined.  It was important that the Department managed outsourcing in a manner that minimised the risk as much as possible.

Mr M Ngubo, Deputy Commissioner; DCS took the Committee through the Department’s presentation (see attached document).  The presentation included the Department’s reasons for outsourcing and the legislative framework for and methods of outsourcing. Details were provided of the services that were outsourced, the duration of some of the contracts and the costs involved.  Tin the 2008/09 financial year, the Department had 886 outsourcing contracts at a cost of R1 148 million p.a., of which 743 contracts costing R1 112 million p.a. were awarded to black-owned enterprises.  The benefits of outsourcing were listed.  The improvements made in the procurement system were summarised.  The presentation was concluded with a summary of the areas for improvement identified by the Department.

Discussion
The Chairperson referred to the claim made in the presentation that there was a cost benefit to outsourcing. When the Committee met with the DCS delegation on 13^th October 2009, he asked them whether they did a cost-benefit analysis on the two public/private prisons (PPP’s) that had been outsourced.  The answer was negative and he wanted to know how Mr Ngubo could now claim that there was a cost benefit to outsourcing.

The Chairperson said that the annual increase in the budget for the Department over the last two years was in the region of 7 to 8 %, but the Department‘s spending on outsourcing was just under 10% and increasing fast. This meant that the money available to the Department for core functions was decreasing.

The Chairperson referred to the statement in the presentation that the DCS did not have the capacity to train managers. He pointed out that there was a Government agency responsible for the training of public service managers. There were 35 Government Departments and all of them required training for middle management employees. He asked whether it would not make more sense to set up a central training facility within Government where all middle managers could be trained.

The Chairperson referred to the outsourcing of catering services. According to the presentation, the DCS did not have the facilities or infrastructure to provide catering for prisoners in-house. The DCS housed in excess of 100 000 inmates and he did not understand how the Department could claim that it did not have the infrastructure. The core business of the DCS was to house, feed, clothe and rehabilitate prisoners.  He remarked that cleaning services were outsourced at a cost of R2 496 216 per annum, while inmates sat and watched television all day.  The cost of cleaning was paid for by taxpayers’ money. Outsourcing medical services was understandable but inmates can be trained to repair their own television sets.

The Chairperson said that he would continue to raise awareness of these issues as long as he was in Government. He felt that some of the expenditure could be cut overnight and he strongly suggested that the DCS ensured that unnecessary items and costs were in fact cut overnight.  If nothing was done, Parliament would be forced to name and shame those responsible for wasting taxpayers’ money.  He considered the expenditure of R5 million per annum on the maintenance of television sets to be extravagant.

Mr J Selfe (DA) recalled that the Department had ordered a baseline skills audit at a cost of R10 million two years ago. This audit was not mentioned in the presentation. As far as he knew, the results of the skills audit were not submitted.

Ms Schreiner advised that a skills audit had been completed by the sector’s SETA and another was completed two years ago.  Skills audits were short term processes that generated a wide range of information. She undertook to establish the facts about the skills audit referred to by Mr Selfe and report back to the Committee at a later date.

Mr Selfe asked whether any other contracts were awarded that were not reflected in the presentation and that the Committee was unaware of.

Ms Schreiner conceded that there might have been contracts omitted from the presentation because the contracts had been completed. The presentation included details of the current contracts only. She offered to provide the information on the contracts awarded in previous years to the Committee, if required.

Mr Selfe referred to the outsourced catering service at a cost of R839 393 000. He pointed out that the contract was Hk14/2008, which was in fact the continuation of contract Hk2/2004. The current contract was for the same services and was awarded to the same company as before. The contract was re-awarded to a service provider that was under investigation by the Special Investigations Unit (SIU). In their report (which must still be tabled before this Committee) the SIU had found evidence of corruption and of the supplier manipulating tender specifications. The report recommended substantial recoveries and the seizure of assets from the contractor. The matter was referred to the National Prosecuting Authority. The re-awarding of this particular contract had led to the lateral transfer of the previous National Commissioner. The Committee was briefed on the matter by the Department on 19th August 2008. He did not understand why a contract was awarded to a company that was under investigation for corruption by a State institution. He wanted to know why the contract was awarded and who had been on the bid evaluation committee. He asked what criteria were applied in awarding the contract. He asked if a feasibility study was completed.

Mr Tebogo Motseki, Chief Deputy Commissioner; DCS, remarked that the issues raised by the Members of the Committee were valid and required in-depth consideration by the Department. He explained that there was an institutional arrangement to process a tender once it had been issued and tender applications had been received. The decision made by the bid evaluation committee was determined by Departmental policy. The bid evaluation committee had certain responsibilities and could not invite into the process external factors that was not under consideration. The committee could only apply the criteria and ascertain to what extent a potential supplier complied with the criteria.  The contract was awarded to a bidder on that basis. Anything outside the criteria was not taken into consideration. Therefore, none of the issues concerning the SIU investigation and report that were raised by Mr Selfe were taken into consideration when the decision was made to award the contract to that particular supplier.  The outcome of the investigation was another matter and might have a bearing on the whether a contract would be awarded to that company in future. He suggested that the legal process currently underway was allowed to take its course but it was a separate issue from the contract that was awarded. He said that the DCS would live with the decisions that were taken, in the absence of information that would prompt them to do otherwise. It might appear that there was a link between the two processes, but he cautioned against drawing a premature conclusion.

The Chairperson accepted the explanation provided and said that the Committee would investigate the matter further when the SIU report became available. The Committee would then have a more complete picture of the situation.

Mr Z Madasa (ANC) noted that 743 out of 886 contracts were awarded to BEE companies and wanted to know if the Department had ascertained that the companies concerned were truly BEE companies. He remarked that certain companies won a tender and in turn outsourced the product or service required by the DCS. He asked whether the DCS evaluated contractors and conducted inspections to ensure that the companies and their offices really existed. For example, Eskom conducted thorough investigations (including visits to the premises of applicants) before awarding tenders.

Mr Madasa referred to the section in the presentation dealing with the improvements made by the DCS to the procurement system. The statement was made that members of the bid evaluation committee had to declare their interests in writing before adjudicating on bids received. He wanted to know if members were recused or if they remained on the committee after merely declaring their interest.

Mr Ngubo explained that, when tenders were submitted, companies had to submit the registration documents, which indicated whether it was a joint venture, as well as a list of the names and identity numbers of the shareholders. The company was investigated to see whether it had defaulted on contracts awarded by other Departments. The National Treasury kept a database of all the companies that had defaulted. Companies were allocated points, which indicated their BEE status. The declaration of interest by members of the bid evaluation committee was a deliberate process. All members had to declare their interests. If a member had an interest, he had to recuse himself.

Mr Madasa remarked that, according to a report by the Public Service Commission, there was a very high rate of non-compliance by Departmental managers to declare their interests.  He asked if any person in the DCS was guilty of such non-compliance.

Ms Schreiner replied that there were two types of issues regarding the declaration of interests. The one issue was the responsibility of senior managers to submit an annual disclosure of financial interests in accordance with the Public Service Regulations. She confirmed that all members of the DCS executive had submitted their disclosures and the Department was currently following up with any person who had not yet submitted their disclosures within the timeframe of the current financial year. The second issue was in the adjudication process. If a person was a member of a bid verification, evaluation or adjudication committee, he/she had to state whether they had any particular interest in relation to the bid process. If the member or his/her partner had an interest, the interest had to be declared and the person had to recuse him/herself. In respect of the generic financial disclosure declaration, the DCS had been late in submitting the information for the previous year to the Public Service Commission, but was in the process of submitting it for the current financial year.

The Chairperson asked whether Ms Schreiner was aware of any officials employed by the Department who had benefited from tenders awarded by the DCS.

Ms Schreiner admitted that transgressions by DCS officials had occurred.  There were disciplinary procedures for such instances but she was unable to provide the details at the meeting. Four new cases were identified in August 2009 in the Select Committee on Public Accounts (SCOPA) report. The Department was currently investigating the cases to verify the allegations. The Department had improved the management of the situation by correlating the financial and interest declarations submitted with the requests for extra public service remunerative work.  The information would be correlated with the CIPRO database and reveal whether any employee had benefited from business with the DCS. The Department worked with the Special Investigations Unit and had developed a tool that would indicate whether people in the Department had benefited from business with the Department. This tool was based on the contracts awarded. The process of evaluating employees for compliance needed to be part of the procurement process at an earlier stage to ensure that non-compliance was uncovered before a contract was awarded.

Ms B Blaai (COPE) wanted to know whether the amount of R20 million for the internal audit function (cited on page 6 of the presentation) had been paid to the co-sourced partner.

Ms Schreiner replied that a three-year contract was awarded and she was not sure exactly how much had been paid to date.

Mr Ngubo added that the contractor had been paid for the work done thus far, but not for the whole amount. He was not sure about the amount either.

Ms M Phaliso (ANC) wanted to know why the vacancies in the Department were not filled.  The vacancy rate was one of the reasons given by the Department for outsourcing. She wanted to know how the 25 year term of the contract to operate a PPP prison was determined. She asked if the Department planned to install kitchen facilities in prisons so that meals could be provided in-house instead of outsourcing catering services.

Ms Schreiner replied that filling vacancies was a prolonged process.  It was difficult to retain internal audit staff as they tended to move around to more lucrative posts. The salary levels were not uniform throughout the public service. The managers in the Department were planning better and further ahead and initiated the recruitment process well in time. The Department had found that certain skills could not be retained in Government Departments and were only available in private auditing firms (for example, in KPMG). The process of recruiting and vetting staff was lengthy and the Department was trying to reduce the length of time.  The two PPP contracts were the first contracts of the kind and were awarded for a term of 25 years.  The Department was obliged to honour the contracts.  She said that it was a misunderstanding that prison facilities would not be upgraded and that catering facilities would never be installed.  However, the Department of Public Works was experiencing challenges with regard to the capacity to deliver.

Mr Motseki explained that the budget for the renovation and upgrade of prisons was located in one Department and the budget for routine maintenance of prisons was in a different Department. This situation impeded the ability of the DCS to provide catering services in certain facilities. He suggested that an open discussion on the matter included the Department of Public Works. He said that the PPP agreements predated National Treasury’s regulation that a feasibility study had to be done before such contracts were awarded. A subsequent feasibility study was done and it was found that the period to recover the cost of construction of the facility was a minimum of 15 years. A contract for a shorter term was not attractive to the private sector.  The Correctional Services Act made provision for a maximum term of 25 years but the term could be shorter.
The Act predated the current National Treasury regulation, which required that feasibility studies had to be done.

The Chairperson noted Mr Motseki’s suggestion to have a discussion with all the Departments involved in the issue of prison facilities.

Ms Phaliso was not happy with the responses from the Department. Some of the questions were asked during the meeting held on the 13^th October 2009.  She felt that the DCS did not have clear timeframes attached to their processes and had no clearly defined processes that included an outline of where they came from and where they were now. She also wanted to know which facilities the Department was talking about. The subject of the meeting was about outsourcing rather than which facilities could be renovated.  She said that corruption was already taking place at the outsourced facilities. She felt that the funds allocated by Government were being spent in an ineffective manner. She asked whether the DCS would continue the practice of incarcerating the elderly as there were some inmates who were 88 years old. She asked when the Department planned to implement the strategy for correctional centers for the youth.

Mr A Fritz (DA) requested clarity on the statement made in slide 10, point 5.2 referring to “the rendering of catering and training services at various Management areas”.  The statement was vague and needed to be more specific. He said that in certain prisons the food could be prepared on-site but catering contracts were invented to award contracts to persons with connections to people in positions of power. He stated that catering was a core function of the DCS. He felt that the Department was insulting the intelligence of the Members of the Committee. He asked if any Regional Commissioners were under investigation for getting contracts from the DCS. The Minister of Correctional Services had admitted that a Regional Commissioner was under investigation for the illegal awarding of a tender to himself.  He requested that deadlines were included in the responses made by the Department.

Ms Schreiner confirmed that a Regional Commissioner was the subject of a disciplinary process. The matter was sub judicé and she could not discuss the case with the Committee.

Mr S Abram (ANC) said that the core functions of the DCS were the provision of food, clothing and shelter to inmates. He asked if the DCS had considered alternatives to outsourcing catering services or merely took the easiest option. He had a report of the expenses incurred by the Department, which was dated 30 June 2009. He was not sure which period was covered in the report. An amount of R54 million was spent on catering for prisoners. R12 million was spent on bread and confectionery and R34 million on groceries. Elsewhere in the report, it was stated that the Department was self-sufficient in terms of various food commodities. He felt that the DCS could create jobs for chefs, cooks and serving personnel. The Department should rather take advantage of the opportunity instead of outsourcing the responsibility.

Ms J Schreiner advised that a feasibility study on the different options available to the Department for nutritional services was currently under way.  Many of the issues raised by the Committee were being investigated. Nutritional services were outsourced at eight of the 48 management areas.  She denied that the Department “took the easy way out” as catering was not outsourced at 40 facilities. The facilities differed in terms of the resources and capacity available at each location.  There was no single simple solution for all 241 correctional centres administered by the Department. Provisions were included in the contracts that the service providers had to use the products produced by the Department .Some facilities had farms and bakeries but others had no means of producing anything. The Department was considering ways to increase self-sufficiency.

Mr Abram asked whether the management of each facility was aware of the challenges.

Mr Motsheki explained that it took two years to renovate the kitchens of a prison in Johannesburg with 12 000 inmates. The DCS had no control over the process or the length of time that it took to complete. Without outsourcing it would have been impossible to feed those inmates for two years.  Feasibility studies were prescribed by law and the DCS had to comply with this legal requirement.

Ms M Nyanda (ANC) remarked that and amount of R1.1 million was spent on a feasibility study. She was concerned over the cost of the study. She found it unacceptable that the representatives of the Department were unable to answer some of the questions from Members because they did not have the information to hand. She felt that they had contradicted themselves and created confusion. The Committee needed to know the truth.

Ms Blaai asked whether the inmates were involved in the catering at centres where catering services had been outsourced.

Mr Madasa asked why the contract to provide catering services was awarded to the same company. He felt that the Committee needed a full explanation of the matter in order to make an objective evaluation. The fact that the contract was re-awarded to the same company created a certain perception as there were other companies that had submitted tenders for the contract. The procurement process was intended to empower smaller companies.  He wanted to know what the Department was doing to assist small enterprises to meet the criteria to win the contract.

The Chairperson explained to Ms Blaai that the food was prepared outside the prison by the catering service provider. He asked what the DCS was doing to encourage other potential suppliers to win tenders so that a single supplier did not have a monopoly.

Ms Schreiner replied that the DCS interacted with potential suppliers on a regular basis and educated them on the requirements that had to be met in order to qualify for a Government contract. The DCS encouraged smaller suppliers to form consortia and phrased the tender specifications in such a way that this process promoted. Tender specifications were narrowed and were specific to one locality or management area, thereby allowing a greater variety of smaller suppliers to win contracts.

In conclusion, the Chairperson warned the DCS that there was a rocky road ahead of them. He reminded the Department of its mission statement, which stated that the DCS strived to provide humane conditions and re-integrate inmates into society. He perceived a contradiction between the mission statement and what was said by the officials, for example that the provision of food to inmates was not a core business. He said that the Department needed to develop a better understanding of what their core business was. He asked how the DCS could consider that the provision of anti-retrovirals was a core business but the provision of food was not. The outsourcing of catering services must include the transfer of skills to inmates and employees of the Department. The DCS could not outsource functions if that process did not result in the improvement of the lives of South Africans.  He remarked that employees of the Department needed to be developed to encourage them to stay in the DCS.  He thanked the representatives for the frank replies to Members’ questions and advised that the Committee Secretary will circulate the agenda for the meeting scheduled for 18^th November 2009.

The meeting was adjourned.