Bosasa nutrition contract: input by National Commissioner of Correctional Services; Department of Public Works on construction cost increases and delays

Correctional Services

22 February 2012
Chairperson: Mr V Smith (ANC)
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Meeting Summary

The briefing by the National Commissioner of Correctional Services on the extension of the nutrition contract, indicated that the contract had a long history. When the CFO and himself were appointed in 2010, they had to address challenges of contract management. The nutrition contract was audited after 2010, when the Minister had stated that nutrition outsourcing had to end. Contract managers had declared in September 2011 that the DCS was not ready to be self-sufficient with nutrition. That was after the Portfolio Committee had asked the DCS in August 2011 if they were ready for the approaching expiry of the nutrition contract. It was decided that termination of the contract could lead to a food supply crisis and riots. The DCS sought legal opinion about extension of the contract. Twelve months was decided upon.

The Commissioner gave a firm commitment that nutrition outsourcing would come to an end by January 2013. There had to be a move to self-sufficiency through the use of offender labour. He would develop a team and phase in DCS officials to deal with nutrition. The contract management unit would be transformed, as would senior and middle management in general.

In discussion, weaknesses of supply chain management and contract management in the DCS came under severe criticism due to excessive reliance on consultants. A delegate from the Auditor General noted that it had been correct procedure to seek legal opinion about extension of the contract. The Chairperson emphatically directed the DCS and the Department of Public Works to cooperate. ANC and DA members alike agreed that failure to move away from outsourcing could indicate that individual and vested interests were being served. It was agreed that the DCS would have to provide quarterly reports on progress towards ending outsourcing, and that supplying the contractor with food products at reduced prices, had to end. As had happened before, the Chairperson told the Commissioner that he had to take his team with him. There was no lack of vision, but there had to be willingness to implement. A DA member questioned why the nutrition contract had been entered into in the first place, in 2004. It could point to vested interest. There had to be a proper enquiry. The question arose: were DCS officials doing business with the DCS? The Chairperson committed the Committee to oversight visits to the seven areas affected, before every DCS quarterly report.

The Department of Public Works briefing provided feedback on observations made by the Committee during an oversight visit to Ceres correctional centre in January 2012. The briefing dealt with delays and cost escalation during the construction of centres at Ceres, Van Rhynsdorp and Brandvlei. Builders’ holiday had caused delays. There were escalation clauses in the contracts for extensions six months or longer. Adjustments could be made. If a contractor underperformed, details would be forwarded to the National Treasury. There were no limits imposed on cost escalation if the client (DCS) approved. There were delays due to unexpected ground conditions at all three centres. A breakdown of initial and actual costs for the three centres was provided. For all three centres combined, additional costs came to R172 million. Centres could not always be built according to the generic layout. Deviations had occurred. There had been delays due to inexperienced labour.

In discussion, the Chairperson told the DPW that it could not expect the public to understand the complexities of factored-in builders’ holiday. It could not be defended to voters. A DA member asked if there was a penalty clause for not delivering on time, and received an affirmative answer. An ANC member complained that government contracts ran to astronomical amounts, and it aroused suspicions about interests. A member refused to accept that drilling had to be done to determine ground conditions beforehand. A question was raised about whether there was checking to see if prices were market related, and investigations into the liquid situation of service providers.


Meeting report

Introduction by the Chairperson
The Chairperson indicated that delegates from the Auditor-General were present, as were national and provincial officials from the Department of Public Works (DPW).

He provided background on the extension of the nutrition contract. The Minister of Correctional Services had stated in a budget speech of 2010, that outsourcing of nutrition would be cancelled. In August 2011, the Portfolio Committee had alerted the Department of Correctional Services (DCS) that the nutrition contract was about to expire, and asked if the DCS were ready for that. A delegation led by Mr Malatsi was instructed to relay Committee sentiments to the National Commissioner and the Minister.

The Chairperson proceeded to ask three questions. The first was why the DCS had only woken up at the last minute. The second was what was to be done. The principle of outsourcing was not a good one. He asked how the DCS would achieve the goal of moving away from it. The third question was about what assurances the DCS could give that the same situation did not arise in the future.

He called upon the Auditor-General to provide inputs about deviation from supply chain management principles, the possibility of fruitless and wasteful expenditure, and the audit implications. The DCS simply had to obtain an unqualified audit during the term of the current Committee.

Briefing by the National Commissioner on the extension of the nutrition contract
Mr Tom Moyane, DCS National Commissioner, said that he did not wish to give a power point presentation. Presentations did not talk. He opted to speak directly.

Mr Moyane noted that the nutrition contract had a history. When he and the CFO took office, there was a need to transform. There was an inability to address challenges and a lack of effective leadership. Transformation at the top did happen, but there was resistance in the organisational culture. There were blockages down to lower levels.

The nutrition contract was audited after 2010, to determine the state of readiness to move away from it, towards self-sufficiency. Each of the seven management areas affected was audited for capacity and equipment. It became clear that there were problems of contract management. There was an assessment of contracts and services in the DCS, during August and September 2011. Contract managers stated in September 2011 that insourcing was not yet possible. The National Commissioner instructed a team to weigh up pros and cons. If the contract was terminated, it could lead to a nutrition crisis which would provoke riots. The kitchen was the nerve centre of a prison.

Mr Moyane then instructed the National Bidding Committee to assess the situation. The committee had met in January 2010 and concluded that a legal opinion about extension of the contract was needed. The supply chain management unit said that it would take six months to advertise the contract. The Adjudication Committee advised that the service provider be consulted. The service provider made an offer of six months without a premium or that 12 to 18 months be considered. The DCS opted for 12 months. The Commissioner called legal opinion and explained the matter.

The Commissioner stated that there was a firm commitment to no outsourcing beyond January 2013. The Chief Deputy Commissioner and the CFO would draw up a project plan. Officials would be phased in to provide nutrition services. He had made an unannounced visit to the Krugersdorp centre to see if it was ready for insourcing. It very definitely was not. There was a commitment to create an environment where offenders would provide labour. With the CFO, he would investigate contract management. Had contract management been effective, it would have told him earlier what the real situation was. Top management had been misled. With respect to issues of financial management, the Auditor-General had stated that the DCS was acting in accordance with the law, if the kitchens were not ready.

The service provider was buying products from the DCS at lowered prices. The contract manager did not represent the interests of the state. He would develop a team, and phasing in of insourcing would start in September 2012. The contract management unit would be overhauled. Transformation of senior and middle management would be hastened. The DCS had interacted with the new Director General of the Department of Public Works on 3 January 2012. The Special Investigating Unit (SIU) would investigate the issue, and the Hawks had also been drawn in. A budget of R410 million was available.

Discussion

The Chairperson said that it had been a case of poor contract management. In spite of directives from the Minister and warnings by the Committee, there had been no change in policy. There had been weakness in supply chain management that merited the attention of the Special Investigating Unit (SIU). Cooperation with the DPW was essential. In future there had to be a quarterly report on the seven management areas affected, as to progress made towards becoming self-sufficient in food provision by September 2012. The DCS Contract Manager had to report on 7 May on the state of contract management in the DCS. There were said to be 30000 consultants in the DCS. Contract managers had to be audited. The DCS had to state who was there, for how long they would remain, and why they were engaged as consultants. He invited the Auditor-General to provide an input.

An Auditor-General delegate noted that Treasury regulations for supply chain management were contained in Section 38(13) of the Public Finance Management Act (PFMA). The Chief Financial Officer (CFO) had to ensure that the procurement system was transparent and cost effective. In terms of Section 39 of the PFMA the CFO had to ensure that overspending did not occur. Treasury regulations required that the CFO guard against irregular expenditure through effective internal controls. The CFO had to prevent abuse of the supply chain management system. The Auditor-General had met with DCS senior management in February 2011, and had asked if the nutrition contract was to be extended, and if so, for how long. The DCS had taken precautions and had seen legal experts about the right procedure. The Auditor-General was satisfied with explanations given. It would report on the nutrition contract as part of audit findings.

Ms W Ngwenya (ANC) was not satisfied with explanations given. The Committee had asked about plans in place for the whole of 2011 without getting an answer. Explanations had to be furnished beforehand. The DCS had not listened to the Minister and the kitchens were not ready. The Committee was not being taken seriously. The Auditor-General had to declare how much had been lost.

The Chairperson stated emphatically that the Committee was telling the DCS and the DPW to cooperate, not asking them. He questioned the DCS relationship with the DPW. He asked about the cost implications of nutrition readiness before 2013.

Mr Moyane responded that the DCS had met with the DPW on 3 February, to discuss issues that affected the DCS. The DPW understood the challenges DCS had to face. The Steering Committee would provide a report on 19 March, about the budget, kitchens, recruitment and training. There was a clear programme. It would be cost effective. The issue at stake was the desire to use offender labour to become self-sufficient.

The Auditor-General delegate added that the contractor had agreed to payment of R2,39 million per month. The total cost would be R24,8 million.

Mr L Max (DA) noted that the Bosasa contract was confined to seven management areas. There were 41 areas. He asked about the difference between the seven Bosasa contract areas and the rest. He asked about the possibility of individual enrichment. He asked what other components would furnish the money to pay for an extended contract.

Mr Max remarked that the 7day establishment worked to the detriment of artisans. He asked if training of officials for kitchen duties, would place them in that category. It had to be reported which kitchens were not ready for insourcing.

Mr Moyane replied that he could not comment on why there was outsourcing in the seven areas, and not elsewhere. He had not yet been appointed when the contract was entered into. He was not currently informed about the readiness of kitchens for insourcing. He did know for a fact that Krugersdorp was not ready, as he had visited that centre. The audit to be supplied on 20 March would give the exact state of readiness, and where the DCS could not yet deal with constraints.

Mr Sokhela, DCS Chief Financial Officer, added that provision had been made to pay for the contract extension, under goods and services, and special assets.

Mr Max reiterated his question about the difference between the seven contracted areas and the rest.

Mr Moyane answered that the seven areas were large centres with more inmates. There were 10 000 at Johannesburg, and 8 000 at Pollsmoor and Durban. There had to be a paradigm shift to self-sufficiency, with facilities created in centres. DCS would provide labour, and had to develop capacity.

Mr S Abram (ANC) remarked that he had empathy for the National Commissioner. He had come into the current situation. Contract management and supply chain management principles had not been adhered to. It was warm bodies who signed contracts. The question was what was done about it. He cautioned that 'no outsourcing by 2013' would not be reached unless bodies did jobs. He asked about plans in place. The Commissioner had to supply targets that the Committee could check on during oversight. He noted that readiness reports had been done by April 2011. Some had been ready. Contractors were currently cooking at centres, which meant that facilities were there.

Mr Abram asked why the Adjudication Committee had only met in January 2012. It had been poor planning. The quality of area inputs had to be monitored to reach the target date. As regarding self-sufficiency, the DCS never reported on efforts to grow its own food. The contractor was buying provisions from the DCS, below market related prices. The DCS had to charge the contractor more.

The Chairperson asked what would be done to improve contract management and supply chain management. He asked about a report on the meeting at Krugersdorp.

Mr Moyane responded that there would be investment in those areas of management to create accountability. There would be disciplinary action against erring members. He felt that it was not enough to report on the Krugersdorp meeting. The DCS would visit all centres affected. Treasury, the Auditor-General and the CFO had to visit centres directly and not wait for reports. DPW contractors had to be talked to on site. Units would be overhauled to create leadership in the office of the CFO. A trading entity had been established to promote self-sufficiency. Food could be produced and costs reduced.

The Chairperson cautioned Mr Moyane that he had to have a team to take with him. There was not a lack of vision. But there had to be willingness to implement it as well.

Mr S Shah (DA), Shadow Minister of Correctional Services, said that he had been encouraged by the Commissioner. He agreed that the kitchen was the engine room of a correctional centre. The DPW had to provide maintenance, but there was a lack of cohesion between DCS and DPW. He asked what actions had been taken with regard to outstanding equipment. He asked if there was evidence that delays had been intentional.

Mr Moyane replied that the DCS had begun to engage with the DPW. Project management was the DCS weak point. He could not be sure about intentional delays. Equipment was being delivered but there were still flaws.

Mr J Selfe (DA) said that he found the frankness of the Commissioner disarming. One could not be angry with him. The contract had a history. It had started in 2004. The original contract for the seven centres had been scheduled to end in 2007. That contract had initially been extended for one year. Ms Moodley had briefed the Committee about it in 2008. It was said that functions would be taken back. The question was why outsourcing had to happen at all in 2004. The DCS did not have access to training programmes and staff. The question was what had changed since 2004. The absence of rational reasons for awarding and re-awarding the contract pointed to vested interests.

Mr Selfe continued that the Commissioner had said that a DCS senior manager had lied to a number of people. A proper enquiry was needed. The point to consider was why the contract had been entered into in the first place. It was hard to accept that a senior manager could suddenly realise in 2011 that the DCS could not provide the nutrition by itself. He encouraged the National Commissioner to keep up quarterly reporting and to launch investigations. It was not only important to manage on the way forward, but also to determine why the contract had initially been awarded.

The Chairperson agreed about the need for retrospective inquiry, to see what had changed.

Mr Moyane agreed that the past was not to be set aside. His predecessors had to have the benefit of the doubt. Reasons for extensions of the contract from 2004 to 2008, had to be gone into, to assess what went wrong. Contract management was not competent. Some officials only got drawn into it because of long service. Senior and middle management had to be overhauled. There were people who did not fit job profiles. Leadership and auditors would get to the bottom of the matter.

The Chairperson called for names of contract managers and supply chain managers. The President had indicated that such people had to be vetted. Names and length of service were needed. He was aware that some contract managers had refused promotion, because contract management was more lucrative.

Mr V Magagula (ANC) noted that neither the President nor the Portfolio Committee were in favour of the nutrition contract. However, he supported the fact that the National Commissioner did not want the chaos of a riot about food. Nothing could currently be done about that situation.

The Chairperson remarked that the would be willing to endorse what Mr Magagula had said, on condition that quarterly reports be given. He added that if nutrition outsourcing was not done with by the beginning of 2013, there would be serious consequences.                                                                                                                                     

Ms M Phaliso (ANC) told the Commissioner that he had not inherited a clean slate, and reminded him that he had a team with him. The Service Level Agreement with the DPW had to be given effect. Service providers were calling the options to the DCS. There were too many consultants. Job descriptions of officials had to be developed. The DCS were being led by consultants whose first interest was to calculate profits. The contractor had taken the initiative by giving an option of 24 months. All Committees agreed that consultants had to be minimised. They did not care about the PFMA. A checklist was needed to say why things were happening.

Mr Moyane responded that the DCS was trying to reduce consultants. The most consultants were in IT, but the DCS had already reduced their number from 85 to 40. There had to be a skills audit. Consultants indeed decided for the DCS. He had taken it upon himself to personally appoint teams who evaluated tenders. It would be investigated whether there were DCS officials in contract management who did business with the Department.

Ms Phaliso asked if there were DCS officials in supply chain management who did business with the DCS. From 2004 to 2012 they could not develop kitchen services for the DCS. She said that the DPW was a department only in name. It was possible that they connived with DCS officials. She insisted that the Committee, not the media, be informed about adjudication. Names of contract managers had to be supplied. Officials would never waste their own money as they did with government money.

The Chairperson agreed that reliance on service providers posed questions about the role of management. The competence of a disciplining agency was important.

Mr M Cele (ANC) asked how many legal opinions had been obtained.

Mr Moyane replied that three legal opinions had been obtained.

Mr Cele asked who owned the kitchen appliances. At  Durban, stoves had not worked since 2009.

Mr Moyane answered that the Chief Deputy Commissioner had been dispatched to deal with issues of ownership.

Mr Z Modise, DCS Chief Deputy Commissioner: Corrections, added that at Durban the kitchen equipment was owned by the DCS, but it was not in working order. The equipment contractor had gone bankrupt. The DCS was working with the DPW to find another service provider. A decision would be based on an audit.

The Chairperson asked when the service provider had gone bankrupt, and why the Committee was only hearing about it now. The Committee wanted to know everything about kitchen equipment in the seven areas. He reminded the Commissioner that he had to rely on other people. He had to ask himself whether he would be fit to manage, if senior management failed him. He asked if there was a contingency plan for bankruptcy. The Department had to assess beforehand if someone could possibly be a risk.

Mr Modise replied that the Committee would be informed. After a matter had been handed to the DPW, it was no longer a DCS responsibility. Actions like blacklisting had to be taken.

The Chairperson asked if the DCS or the DPW appointed the equipment contractor.

Mr Modise answered that the DPW made the appointment.

Mr  V Ndlovu (IFP) suggested that the Adjudication Committee be fired if the nutrition matter remained unresolved.

The Chairperson asked the CFO if having money for it in the budget meant that the extension of the contract had been foreseen.

Mr Sokhele replied that the DCS always had to ensure that kitchens were ready. Each centre had been budgeted for. He had personally visited Waterval to see if outsourcing was necessary or not.

Mr Ndlovu hoped that the matter would not be taken as unauthorised expenditure at the end of the year.

The Chairperson remarked that it depended on the Auditor-General investigation whether it would be found to be fruitless or irregular expenditure. He reiterated that if the beginning of 2013 deadline was not reached, consequences would be dire.

Mr Moyane replied that he trusted his team to make the objective a reality. There had been agreement to commit to the issue. The legal opinion documents would be sent to the committee secretary that afternoon. The Deputy Minister of Public Works had admitted that the DPW was currently in ICU. The Committee would be informed about challenges and measures taken.

The Chairperson stated that the Committee would visit the seven management areas affected, all over the country. There would be oversight visits done every time before the DCS quarterly report.

The Chairperson handed over to the DPW who would provide a briefing about lengthy delays in the construction of centres at Van Rhynsdorp, Brandvlei and Ceres. The cost of the Kimberley centre had escalated from an initial R250 million to an eventual R800 million.

Department of Public Works on observations of Committee during January 2012 oversight visit
Ms Ellie van der Hoven, DPW Project Manager, said that a Service Level Agreement (SLA) had been signed between the DCS and the DPW on 17 October 2011.

Builders’ holiday was an unforeseen cause of project delay. This was factored into the contract period before tender. Once the contract extended over a builders, holiday, that time was added to the contract due to extensions being calculated in working days.

For contracts longer than six months, escalation clause/s were included in the contract document. The Contract Price Adjustment Provisions (CPAP) allowed for the contract to be adjusted. When a contractor underperformed contractually, details were forwarded to National Treasury. There were no limits to cost escalations due to deviations from the original plan, as long as those were approved by the client (DCS).

At Ceres, ground conditions were different than during tests prior to construction, which influenced the project. At Brandvlei there was unexpected underground water. At Van Rhynsdorp underground structures were encountered during construction.

Ms Van der Hoven provided a breakdown of additional costs for each prison. The three projects could not be implemented exactly as per generic layouts. DCS Headquarters had approved changes to generic layouts. Ms Van der Hoven provided figures on initial and projected final costs for the three centres. For Brandvlei the figures were R315 million and R390 million. For Van Rhynsdorp it was R219 million and R286 million. For Ceres it was R212 million and R242 million. There were delays attributed to inexperienced labour.

Discussion

The Chairperson told the DPW that the public did not understand such things as how builders’ holiday affected the length of construction. The public understood in terms of when centres would be ready for inmates to move in. He had to defend the construction project to voters. If it had been Vincent Smith (Pty) Ltd, he would have blown his credibility. Escalated costs on the three centres was R171 million more than the Department had come to the Committee for. Government had to get its act together.

Mr Max asked if there was a penalty clause for not finishing on time. If not, it was of benefit to the contractor to take his time. He asked whose responsibility it was to investigate the liquid situation. He asked if there were checks to see if construction prices were market related. There seemed to be no limit to cost escalation. The question was how far government could go.

Ms Van der Hoven replied that the contractors at Ceres and Van Rhynsdorp were in penalty at that very moment. Regarding the liquid situation of a bidder, she noted that contractors registered yearly, and that the DPW checked tax clearance certificates. The DPW worked with cost estimates, variation from estimates at market related prices had to be explained. She said that escalations were not due to cost increases, but to additional work performed.

Mr Abram asked about some extensions granted. There was R5,5 million for prison furniture. Food trolleys were added. R2,2 million was required to replace contaminated soil. Government contracts came to astronomical amounts. Change to floor specifications required R10 million. If things were not looked at from the outset, one could get “hond se gedagtes” --- it aroused suspicion.

Ms Van der Hoven responded that furniture extras to the contract were items requested by the DCS. Costs could be exceeded, as long as it was agreed upon.

Mr Peter Chiapasco, Acting Deputy Director General: Key Accounts Management and Inner City Regeneration, provided an example of what contaminated soil could mean. It was discovered at a certain site that it had formerly been used for car repairs. Oil had leaked into the soil, making it unsuitable for building on.

Ms Van der Hoven replied that she agreed that planning could be communicated more fully. The DPW could declare at the outset that the project would cost R 200 million, but that the planning period had been short, and that other issues could arise.

Ms Phaliso insisted that ground conditions could be determined from development plans at municipalities. It could not be true that ground had to be drilled to find out conditions.

Ms Van der Hoven replied that it was considered common practice to drill dry holes to determine ground conditions.
 
Mr Moyane noted that the DCS had signed a service level agreement with the DPW on 30 March 2011. The DPW sent a version to the DCS that contradicted legal opinion on both sides.

Mr Chiapasco answered that revisions to the document might not have reached the National Commissioner yet.

The Chairperson adjourned the meeting.


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