Public Private Partnership (PPP) Information Technology (IT) Contract with Siemans: Department of Labour briefing on progress

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Labour

08 February 2011
Chairperson: Mr M Nchabeleng (ANC)
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Meeting Summary

The Department of Labour briefed the Committee on progress made in addressing the issues identified with the Public Private Partnership into which it had entered with Siemens in 2002 for the provision of information technology to the Department. The ten year contract which was due to expire in 2012 had an original cost estimate of R1.2 billion but at the end of 2010 this had escalated to R1.3 billion due to factors such as the exchange rate, the Consumer Price Index and additional costs. The projected cost was now estimated at R1.9 billion by November 2012 when the contract was due to end.

The Department detailed the components of the Public Private Partnership and the growing dissatisfaction with Siemens' service delivery especially in the past three years. Complaints were registered on the number of partner delays in systems development, a lack of capability, poor quality and obsolete equipment. Retrenchments and a high staff turnover, including the exodus of key people back to Germany, had resulted in the loss of skills and knowledge to service the Department.

A major concern was that there had been a cession of the Public Private Partnership contract by Siemens and an internal sub-contracting arrangement had been made. The reason given for this carve-out was the restructuring and unbundling of the company in Germany.  A further challenge was that the negotiators of the contract had made an arrangement whereby the Department of Labour’s information technology staff were transferred to Siemens, thereby effectively decimating the Department's information technology capacity.

A diagnostic review of the Public Private Partnership contact had been undertaken which included engaging KPMG, whose frame of reference had been to look at the carve-out by Siemens, the unilateral decision by Siemans in adopting the Systems, Applications and Products in Data Processing [SAP] platform and software licensing issues. They found both these actions to be in breach of the contract and that Siemens had defaulted. KPMG also investigated termination options and if there were any penalties that were due to the Department. The Department had decided on terminating the contract at the end of its term and presented its strategic plan towards the completion of the Public Private Partnership. It reported that an exit and transfer plan was in draft form and that the development of a new information and communications technology strategy by the State Information Technology Agency was underway.

The alarming escalation in costs elicited strong reaction from the Committee, as did the fact that the service delivery from Siemens had been unsatisfactory, that there were indications of over-billing and that the Department's information technology capacity had been lost and would have to be rebuilt from scratch. Members also expressed their suspicion of collusion and corruption and profiteering on the part of their contractual partner, and observed that complex legal jargon was used to hide such exploitation: South Africa was a fragile young democracy, and was regarded as a place to make huge profits. Members resolved to request the Directorate for Priority Crime [the Hawks] to investigate. The Chairperson concluded that the Minister should be engaged on the matter.  

Meeting report

Mr Sam Morotoba, Acting Director-General (DG), Department of Labour (DoL), said that the Department had briefed the Committee on its information technology (IT) contract with Siemens on 05 November 2010 and that he was reporting on progress made thus far. He stated that the Department had signed a contract with Siemens Business Services in December 2002, after discussion that was led by the State Law Advisor, the National Treasury and the IT section of the DoL. The contract was for a period of ten years (December 2002 - November 2012) and at signing the initial cost for the lifetime of the contract was estimated at R1.2 billion. As of the end December 2010/January 2011 with the cost of the exchange rate, consumer price index (CPI) and additional services indicated in the Department's Annual Report, the estimated cost had risen to R1.3 billion. Using the same CPI and the costs of additional services indicated, the projected costs would be R1.9 billion by November 2012 when the contract ended.

Mr Morotoba explained why the Department had engaged in this Public Private Partnership (PPP) for IT services. In 1999/2000 there was a very strong push on Government to outsource a number of functions that were not considered the core business of the various departments. This had led to cost cutting by departments in various ways such as outsourcing cleaning and IT services. As Treasury could not give the Department additional funds to sustain services, there was a call to enter PPP's. Amongst the arguments of the time was that the private sector would bring in the much needed capacity. The DoL had rationalised that it would be too costly to run its own IT services internally. By getting an IT company from outside they would improve their IT capability and would leverage specialist knowledge, expertise and best practises and develop the DoL's IT services up to international standards.

The second motivation was the need to address the high turnover of DoL IT staff members, who were being poached by other companies, and this was seen as a good strategic way to contain the exodus of IT staff.

Other motivating factors were the fact that each province was using different companies and incompatible systems. The DoL needed to integrate labour market services and systems to offer better services and to move towards automation of services and e-government initiatives. It was also felt that a PPP would be a means of achieving maximum IT benefits and objectives against budgetary constraints.

The components of the PPP in terms of risk sharing had been that the DoL was responsible for the articulation of the business requirements. Siemens was responsible for the systems design, build, operation, maintenance and upfront capital investment. The deliverables were that IT operations and infrastructure would comprise 70% of contractual deliverables and systems deliverables would account for 30% of contractual deliverables.

Mr Morotoba said he would refrain from discussing how the relationship had developed over the years. He said the situation in which the Department found itself currently was that there were a number of partner delays to systems development arising from a lack of capability, poor quality and resource management.  There had been IT partner retrenchments, contract terminations and high staff turnover resulting in loss of skills and knowledge to service the DoL. There had been an exodus of key people from Siemens back to Germany.

A serious concern was that there had been a cession of the PPP contract by Siemens. Mr Morotoba stated that the service provider on the ground was not the original service provider and there appeared to be an internal sub-contracting arrangement by the main contractor who wanted to carve-out. The reason advanced for wanting to carve-out had to do with restructuring that took place in the head office in Germany in a process of unbundling.

A further challenge was that the negotiators of the contract made an arrangement that allowed for the transfer of the Department’s entire staff responsible for IT services to Siemens. Eventually there were only a few staff to oversee the work being done by Siemens and finally there was only one staff member, the Chief Information Officer, in this capacity. There had been the appointment of three directors. The bulk of the money for IT had gone to Siemens. Three years ago it had been realised that the situation was getting out of control; last year serious efforts were made to review the situation and a diagnostic review of the PPP contract was ordered.

Mr Morotoba outlined the DoL's strategic plan towards the completion of the PPP and indicated the current stage of completion. The diagnostic review of the PPP on the identified areas had been completed. The development of the exit and transfer plan was in draft form and was currently in the consultation stage. The establishment of an internal steering committee to manage the transition to a new IT delivery model had been completed. The Development of a new DoL information and communications technology (ICT) strategy by the State Information Technology Agency (SITA) was underway.

The diagnostic review extended to include external assistance from KPMG, whose frame of reference was to look at the document delivery processes in order to determine the impact of the Siemens carve-out and cession of the contract by DoL. KPMG had to determine the business rationale for the use of Systems, Applications and Products in Data Processing [
Systeme, Anwendungen und Produkte in der Datenverarbeitung] (SAP) as the solution platform unilaterally decided upon by Siemens and to determine responsibility and liability to purchase software licences. Furthermore KPMG was instructed to investigate and identify current termination options and whether there were any penalties due to the Department as the contract did allow for penalties. KPMG was also asked to determine whether the 'additional services' had been appropriately costed. Mr Morotoba explained that additional services which were considered 'out of scope' had to be performed by Siemens and the DoL had been unable to test the external market to check if the fees for the services were compatible with market prices. KPMG had also to identify measures to address current delivery challenges.

Mr Vikash Sirkisson, Chief Information Officer, DoL, presented the findings and recommendations of KPMG in terms of the frame of reference outlined by Mr Morotoba.

The KPMG findings on the 'carve out' were that Siemens had outsourced the delivery of its services to a subcontractor. The DoL had not agreed to this arrangement nor was it obliged to agree to the cession of the contract and thus the outsourcing of services constituted a contractor default. The recommendation made by KPMG was that the DoL request Siemens to rectify the situation within specified timeframes.

On the business rationale for the use of the SAP platform, KPMG found that there was no agreement from the DoL for the use of this platform and that there had been no formal feasibility study conducted to determine if this was the most suitable platform. KPMG recommended that the DoL should decide on whether to continue with the SAP platform.

KPMG findings on the responsibility for licences was that no reconciliation had been done by Siemens against the baseline in the contract for licences and no approval had been given by the DoL for the use of the SAP platform. The DoL was not liable for additional costs with regard to licences. The KPMG recommendation was that if the DoL continued with the SAP platform then usage over the contract baseline would be the Department's responsibility.

On the termination options, KPMG submitted that termination due to contractor default involved litigation and was an onerous process. The other options were voluntary termination by both parties and a negotiated arrangement to contract termination whereby aspects that could be delivered were continued till the end of the term of the contract. KPMG recommendation was that a negotiated arrangement as the legal route would be too costly, lengthy and non-beneficial to the DoL.

KPMG found areas where the DoL could implement penalties but they had to be fully investigated and penalties instituted where identified.

On the costing of additional services KPMG found that there was evidence of billing inconsistent with the intention of the contract. KPMG recommended that the Department review invoices and the costing applied, identify where over billing had occurred, and reclaim the excess amount.

Mr Sirkisson briefly outlined the DoL's IT projects in progress, their current status, timelines and risks attached. He indicated that the exit and transfer project which would expedite the closure of the PPP and the transition to a new ICT environment was underway. A strategy document had been developed and was in consultation. An IT steering committee had been setup to manage the process with a timeline of October 2011 to finalise matters.

Mr Morotoba said that after the diagnostic review it had been decided not to renew the contract and a letter of termination and notice of the DoL's intention not to renew the contract had been given to Siemans. Concurrent to the involvement and the resultant recommendations made by KPMG, the Department also engaged with the National Treasury, SITA and the State Attorney to assist in resolving the PPP contract problems. The Department had strengthened governance structures to oversee current IT projects and the management committee received regular progress reports. A senior manager from SITA had been appointed to oversee the PPP contractual matters.

Mr Morotoba stated that high level engagement with Siemens was underway. Armed with the KPMG diagnostic report and the support of the National Treasury, the State Law Advisor and SITA, the Department was fully equipped and confident that it could enter into negotiations with Siemens that would result in a successful outcome.

In conclusion, Mr Morotoba said he recognised the strategic importance of IT to the core business of the DoL and discussions and negotiations were being undertaken with SITA on a range of issues including security of information. He assured the Committee of the commitment of the Department to seeing that the IT problems were solved.

Discussion
The Chairperson commented broadly on the shortcomings in the PPP. He expressed his expectation that when the contract had been signed, the State Law Advisors or the Department's legal team should have covered the DoL in case of deviations by the Department’s partner to ensure that a quick intervention could be made when a deviation occurred. On possible overcharging by Siemens he asked what the DoL's plans were to recover the money. He requested that the Department check if any collusion between staff members and the partner Siemens had occurred and asked what action would be taken if there was collusion to ensure that this was not repeated.

Mr B Manamela (ANC) said there had been a general trend of problems with regard to PPP's which needed to be looked into. Alarming escalation between the initial costs and the final costs happened in other cases, for example the Gautrain. Siemens was also not the only PPP that had resulted in retrenchment or loss of employment. Thirdly, the major benefactor had been the private sector instead of the public sector and this had to be improved. He referred to the recommendations of the KPMG and acknowledged the action taken by the Department and its involvement of Government agencies. He said, however, that there was specific action that had to be taken internally on issues such as the fact that approval had not been given to Siemens for the choice of SAP as a platform. Action had to be taken against those in the Department responsible for monitoring the contract and ensuring that Siemens delivered on what was expected. He hoped that the Members shared his view that it was a serious disregard of public resources that equalled corruption. He hoped that the Department would respond quickly to the request for figures requested by the Chairperson.

Mr Manamela asked to what extent there was a guarantee that, at the conclusion of the term of the contract, all the defaults and what was due to the State was duly provided for. He asked whether the DoL would take Siemens to court which was ultimately what one would want to see. He continued, that clearly from the KPMG report, Siemens had defaulted and should be taken to task, even if it meant legally.

Ms L Makhubela-Mashele (ANC) added to the comments on collusion and said that at the Committee's previous engagement with the Department it was discovered that some of the services that should have been provided by Siemens were never provided and Siemens was never held accountable for not delivering the services. She said that an enquiry should be conducted on the level of involvement of DoL staff with Siemens. She also commended the Department for acting on the issue and moving ahead with terminating the contract. She said that when the Committee had visited labour centres some were not operating because of IT problems and old computers resulting in long queues. Service delivery was poor and Siemens had not played its part. She commented on the exit strategy and the establishment of a steering committee and noted the timeline for October 2011.She requested that the Portfolio Committee receive a three monthly progress report on this and the progress made by the Department in establishing its own ICT centres.

Ms Makhubele-Mashele referred to the Committee's previous engagement with the DoL on the PPP in November 2010 and the discussion on Siemens' unbundling and asked what had happened to that process and what the status quo was and the talk of Siemens becoming a South African company.

Mr A Williams (ANC) said that Mr Morotoba had indicated that problems with the Siemens contract had emerged three years ago and he thus presumed that for six years nothing had been wrong. He, like the previous speakers, queried who had been responsible for monitoring the implementation of the contract and why problems had only been picked up three years ago as they could not have emerged only then. He queried whether the Department had the capacity to manage the replacement IT system as all the IT staff had been transferred to Siemens as part of the contract. He observed that the intent of the contract was to improve IT capacity in the Department but as the result of the contract the IT staff all went to Siemens. Thus the IT capacity of the DoL had been destroyed and he wanted to know what the plan was to bring it back. He commented that the Chairperson had requested some of the documents and he would like to see the KPMG report in order to understand exactly what had been said. He asked whether Siemens had not breached the contract by outsourcing and whether it was thus possible to walk away from the contract. He also wanted to know when Siemens had commenced with outsourcing.

Mr F Maserumule (ANC) said he was suspicious of the relationship between the two parties in the contract as it 'took two to tango'. Business could not exist without profit and the Department was dealing with a huge multinational institution which by its nature was expected to have huge profit margins. Complex legal jargon was used to hide daylight robbery and he reiterated that he was suspicious and also very frightened. South Africa was a young democracy and very fragile and it was the place to go to make huge profits. He proposed that the matter be investigated further.

Mr W Madisha (COPE) said that his colleagues had covered most of the issues he had wanted to raise. He said he was happy with the DoL's plans. He said the actual implementation was key and had to be done as a matter of urgency. He said that when the Department reported back in the next two or three months they should indicate what had been done. He wanted clarity on the notice of the intent to terminate the contract given to Siemens and the timelines provided for implementation.

Mr G Boinamo (DA) stated that clearly there was a relationship of corruption between Siemens and certain key people and this needed to be investigated. If one entered into a contractual agreement with any service provider it was in black and white and one knew what one had to pay and for what. He could not understand why there was over-billing unless there was corruption. It was a matter of paying on what was delivered and what had been agreed upon.

Mr Boinamo said he was very interested in the findings of KPMG that the Department had not agreed to the outsourcing and subcontracting by Siemens, that it had not approved of the use of the SAP platform, and that a feasibility study had not been made on the suitability of SAP. He questioned why a feasibility study was not done as it would have guided the DoL on whether it could deliver what was expected or if SAP was the wrong choice. The matter had to be thoroughly investigated.

Mr E Nyekembe (ANC) joined his colleagues in expressing appreciation to the DoL for what it had accomplished on the Siemens contract since the last meeting and also joined them in requesting that there should be further investigations. He added that the investigation should be intensified in order to get to the roots of the matter. He referred to Mr Williams' request to see the KPMG Report but said that the DoL should summarise the areas with which it had mandated KPMG. He said that even if the contract with Siemens was terminated, the investigation should not stop.
 
Mr Nyekembe asked about the matter of the Compensation Fund and Rand Mutual Association, and the termination of the arrangement which had been raised at the meeting in November 2010.

Mr Nyekembe added to the concerns raised by Mr Williams on the transfer of the IT staff to Siemens. He asked where the Department was going to source IT staff. He understood that the staff members were not Department employees any longer but they had been transferred as a result of the Siemens contract.

Mr Manamela said that the Committee was in unison that there was a generally corrupt relationship between some people in the Department and Siemens. He said that the contractual obligations with Siemens had to be sorted out. Beyond that there had to be action by other state legal and investigative institutions like the Hawks. The police had to intervene to ensure that people who had improperly benefited from public funds were prosecuted.

Ms Makhubela-Mashele stated that she wanted to make two additions to what Mr Nyekembe had said. She said that at the time of the termination of the contract between Rand Mutual and the compensation Fund Members had been told that Siemens was still procuring software from Germany. She wanted to know what had happened to the software. Secondly Siemens had not met some of the contractual obligations. She also asked what had happened to the team that had been set up by the former DG to look at this matter and to hold Siemens accountable for not delivering on its contractual obligations. Departmental staff members were also not doing what they were supposed to be doing and the team had to monitor this.

Mr Maserumule said that the Government had to embark on a process of vetting and screening people as a lot was at stake. He gave the example of the Scorpions in which almost 50% of the people were not vetted and had access to highly secretive information that had been meant to protect the country.

The Chairperson stated that this was the only country we had and we had to do things the right way. He said the Committee was not a competent body to investigate these kinds of suspicions. Something went horribly wrong and the South African government and people did not benefit from the contract with Siemens. He said the matter should be sent to professional bodies to settle the matter once and for all. Members had vented their frustrations and he wanted the Committee to deal with the matter and close it.

Mr Williams said that it must be remembered that there was a corruptor and the one corrupted. He asked if the Department could give a breakdown of what the R1.3 billion had been spent on as it seemed as if nothing was working. From the reports of other members, the labour centres were not working. He supported the move to bring in the police but Siemens also had to be dealt with as multinational companies should not be allowed to come into the country and rip us off. He called for vigilance as this behaviour from a private sector company was completely unacceptable and should also be looked into and charges laid.

Mr Morotoba responded on the perception of corruption and collusion members had voiced about the Siemens contract and to the query from Mr Williams on why this had not been picked up earlier by the Department. He said that the Department had briefed the committee on previous occasions and thus he had not given a historical account. He said that when suspicions had been raised, the suspects -, the Chief Information Officer (CIO) and the Chief Financial Officer (CFO) - had been confronted. They had tendered their resignations and left. He acknowledged that the negotiations on the contract could have been handled better and monitoring of the project had been lax. He assured the members that the KPMG recommendations were being handled at a high level including the State Legal Advisor and neither party could run away from its obligations. He said that if one overcharged it could amount to fraud; however, charges had to be backed with evidence and this was a complex matter.

Mr Morotoba said the transfer of the IT staff had placed the Department in a weak position and it should have built capacity instead. He said that in the process something went completely wrong and it was now taking steps to rectify the situation. Siemens was a company with a good reputation internationally and if there was an acknowledgement on its part that it did not discharge its functions it would damage the brand name and it would want to rectify that. The problem was that most of the people who had been in charge of the contract had left and it was not clear whether it had been due to internal pressure.

Mr Morotoba acknowledged the compliments from the Members and added that there was still much to be done. He clarified that there was a requirement of a two year notice period to terminate the contract at the end of its term and this had been done.

Responding to the question of over-billing, Mr Morotoba said this was being investigated and law enforcement would be involved if needed.  Because of the seriousness the Department attached to the contract, progress reports were on the agenda of every meeting. One of the things that were being done was to increase the capacity of the office of the Chief Information Officer. One of the difficulties was that the challenges intimidated officials and they often turned down the position as had been the case with the previous Acting CIO.

Mr Morotoba acknowledged that there were issues around the IT staff members who had been transferred to Siemens. Some of the staff had left Siemens and some were working for various Government departments and parastatals. In preliminary discussions with National Treasury it had been agreed that, by June 2011, the DoL would submit a detailed bid for the financial allocation for the next year which would also cover the IT capacity. He said that for this year the Department had asked for R800 million and the Minister of Finance would indicate how much the Department would be allocated after the President’s State of the Nation address. The expected amount was for a six percent CPI adjustment and, technically, the DoL would achieve an actual increase in the budget of one percent. From the existing budget there was no way to source IT capacity unless some services were decommissioned from Siemens and a portion of that funding was redirected. SITA had been engaged to assist in a number of areas including monitoring.

Mr Morotoba agreed with Mr Maserumule that the vetting of staff was critical. There were benefits to vetting, such as having people whom one could trust with sensitive information, but the downside was that it was a long process and, in the three to six months it took to complete, people were no longer interested in the position. There was a move to delegate some of the functions in the Department and to distinguish areas of a strategic and sensitive nature for security purposes: hopefully, this would alleviate some of the problems.

Adv N Phasha, Chief Legal Advisor, DoL, elaborated on the legal aspects of the contract. He said that the contract had not been properly managed and whatever one wanted to do now had to be found in the contract. When one looked at the relationship between the Department and Siemens itself, there were unauthorised actions and breaches such as the introduction of the SAP platform. On the issue of overpayment or payment made in advance, Adv Phasha said that it would be difficult to determine what the position was, but if it was not provided for in the contract then it could not be done. He commented that there had been breaches on both sides. On the options available at the present moment, Mr Phasha commented that it was too late in the life of the contract to terminate it as that would entail a protracted legal process. He advised the Committee that it was not a viable option. He alluded to items that had been 'out of scope' in the contract and these could account for additional costs. He agreed with the Members that there should be further investigations as the contract had not been properly managed.

Mr Sirkisson gave a breakdown of the R1.3 billion budget allocation for the contract. He commented that one of the problems of the contract was that it had not been structured around milestones and deliverables. He said that 70% of the money had been for infrastructure and IT operations such as the data systems, setting up and operation of the  help desk and office productivity. The balance of 30% had been allocated to systems development.

Responding to the query of why a feasibility study had not been done on SAP, Mr Sirkisson said that it had been Siemens' responsibility to ensure that it was done on information supplied by the Department. The onus had been on Siemens to identify the best system based on a feasibility study and this had not done. This had been one of the findings of KPMG.

Mr Sirkisson noted the Committee's perception that there had been excessive profit making by Siemens. He stated that in terms of the contract, the maximum profit allowed was 10% after tax and that condition was one of the positives in the contract.

Mr Bheki Maduna, Chief Financial Officer, DoL, responded to the query on the possible amount that the Department could claim from Siemens for over-billing. He said there had been a report identifying over-billing and such a problem as connectivity to a labour centre on which the annual report gave further details. The other possible area for claims was penalties for late delivery according to the timeframe; he commented that services had often been delivered way past the delivery date. Financially, the handling of the contract had been problematic. There had been a financial model that had been used to cost each and every item and it would be necessary to go back and quantify the cost of items that had not been delivered; those were the amounts which could, possibly, be claimed back. The “descoping” of items which had not been delivered was also an area where there could be possible savings. Another area for possible claims was user devices such as laptops and desktops. In terms of the contract, there had been a count of user devices in the Department and the agreement was that the number of users had to exceed the 6 000 mark before an increase was triggered. In 2005 this increase had been triggered but the records from the human resource department did not support this. This would constitute an overpayment and should be investigated and quantified before taking it further.

Mr Sirkisson said that the termination of the arrangement between Rand Mutual Association (RMA) and the Compensation Fund (which had been a pilot project) was based on an audit study that had been conducted at that time. Based on the audit and the fact that the Department lacked the resources needed, it had been terminated.

Mr Morotoba explained that RMA had been licensed by the DoL as an agency to administer compensation to the mining industry. The Compensation Fund had been experiencing difficulties in retrieving files and had serious backlogs; an automated alternative to paper storage of files was sought. An arrangement was entered into with RMA on a pilot basis using their platform for which RMA did not charge the DoL. However a problem arose with Siemens, the DoL's IT internal licence holder and PPP partner who dictated that no third party arrangements could be entered into.

The Chairperson commented that Mr Morotoba was painting a terrible picture of a relationship that was not working. There were issues of trust and the DoL should not believe in the universal goodness of people as it was the nature of business to make profit and to look after its own interests. He felt strongly that the Committee should approach the Hawks to investigate and that the matter be referred to the relevant channels in Government. He requested that the CIO submit the DoL's input made at the meeting in writing to the Committee.

Mr Boinamo referred to Adv Phasha’s comments that the contract should not be terminated. He disagreed with this opinion and stated that the contract could be cancelled and that another contractor could complete the work that was not done, and he asked how the Department would be disadvantaged if it did this.

Mr Williams asked, if the contract could not be terminated while it was estimated that the total cost was going to be R1.9 billion with R1.3 billion as the current cost, what processes existed to monitor the spending of the remaining R6 million.

Mr Nyekembe stated that the officials from the DoL had revealed huge loopholes in the contract with Siemens. He said that the issue of the RMA was also symptomatic of the problem and he asked if the Compensation Fund was experiencing backlogs once more. He acknowledged the Department's commitment to addressing the issues of the contract at its weekly meetings but he also thought that it should update the Committee as well.

The Chairperson summarised the feeling of the meeting and concluded by stating there should be further investigations by the Hawks and that the Minister would be engaged on the matter.

The Chairperson proposed that the DoL's usual briefing to the committee after the State of the Nation Address should be combined with the presentation of the Department's strategic plan.

The Meeting was adjourned.


 

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