Siemens Contract and IT systems strategies of Department of Labour

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Employment and Labour

06 March 2012
Chairperson: Mr M Nchabeleng (ANC)
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Meeting Summary

The Department of Labour (DoL) briefed the Committee on its Information Technology (IT) operations, giving a detailed description of the public/private partnership (PPP) that was initiated in 2002, to run until 2012, between itself and Siemens. The project was originally costed at R1.2 billion but inflation raised these costs to a projected R1.9 billion. There had been problems throughout, and detailed reports and investigations were instituted by National Treasury and its contracted auditors KPMG, as well as internal inquiries by the DoL itself. The contract failed to specify progress deadlines, although it did place obligations on DoL to make regular payments. Although Siemens failed to deliver on some key objectives, and although the systems that it set up were inadequate and slow, it was noted that DoL was not entirely blameless, as it had failed to specify exactly what those systems were required to do, and the DoL lacked the capacity to manage the contract properly, and, in particular, to ensure adequate transfer of skills from the 97 contracted Siemens staff to the 3 DoL staff. DoL had not taken the decision to initiate this PPP unilaterally, but it was decided upon by Cabinet as a pilot project. It had been thought that the budgetary constraints would be addressed by this contract, since the private partner had to finance the initial capital outlay. In 2010, Siemens unbundled its South African operations, and the new Director General of DoL thought it prudent to commission an internal inquiry, and to evaluate the exit and transfer options from this contract. The internal inquiry recommended that IT be elevating to a strategic function, and that full support had to be given to the Chief Information Officer. A systems review had now been completed, and although it was recognised that DoL had to build capacity, this was not possible before the ending of the Siemens contract. It was agreed that Siemens must replace 50% of the hardware, and ensure that the remaining hardware had at last a two-year useful lifespan. Total recapitalisation of infrastructure would have been too costly within the PPP. After consultation with the  State Information Technology Agency, National Treasury, and South African Revenue Service, it was decided to hire the firm Accenture  to help with the turnaround and exit strategy, and it was appointed under emergency Treasury Regulation 16A6.4. Accenture had completed an analysis of requirements in preparation for the exit from the PPP, and would develop a new strategy from March 2012. It was not acting as a replacement for Siemens, but this was a stop-gap measure to assist DoL with benchmarking exercises. The four work streams and the arrangements on each were described.  Lessons learned from this exercise included limitation of contracts to five years, the need to ensure internal capacity to manage contracts, and the need for effective skills transfer, and strategic placing of IT needs in the organisation.

Members raised their concerns over the use of emergency Treasury regulations for appointment of Accenture, questioning why this was necessary, since DoL was well aware of the imminent ending of the contract, and cautioning that such emergency measures posed the risk of corruption. The Chairperson emphasised that this report must be thoroughly discussed, but noted that although a Member was of the view that the money represented wasteful spending, there had been an auditing process. Very strong reasons would have to be advanced to open up enquiries into the behaviour of the former DoL officials, who were not acting unilaterally, but were following a Cabinet decision. The role of the State Information Technology Agency was discussed. Members asked if there was indeed likely to be skills transfer, particularly in view of high staff turnover, and noted that a new Chief Information Officer had been appointed, although the name was yet to be released. The costs of the Accenture contract were questioned, and the Committee asked how similar problems would be avoided in future.

Meeting report

Department of Labour and Siemens Public/Private Partnership contracts
Mr Vikash Sirkisson, Acting Chief Information Officer, Department of Labour, gave a background of the Public/Private Partnership (PPP) between the Department of Labour (DoL or the Department) and Siemens. This was initially projected to cost R1.2 billion, and would run from December 2002 to November 2012. However, the cost to the DoL escalated, and was now projected to cost R1.9 billion, due to inflation over the period. The DoL had structured this PPP instead of using other information technology (IT) strategies because it was believed that it would improve capabilities and exploit best practice methods and technologies, address the high internal staff turnover at DoL, whilst also addressing budgetary constraints at the time, as the private partner was to fund the initial capital outlay. The contract aimed to support government’s effort to move toward automation of client services through e-government.

Mr Sirkisson reported that although this PPP had achieved some degree of automation in the DoL, and some control of staff turnover, it had come with limited reliability. The contract had resulted in hue cost to the DoL. Unfortunately, for the amount of money spent (which was detailed in the presentation), there had been relatively little transfer of best-practice skills. The systems were slow and prone to numerous failures.

The project had therefore been subjected to two reviews by KPMG, the first commissioned by National Treasury, and the second commissioned by the DoL in December 2010. The first review found there was insufficient monitoring and contract management by the DoL, and that there were no  third-party resources to exploit PPP value (as set out on page 71 of KPMG report), and that there was lack of engagement with stakeholders. The second review took place after Siemens restructured its business to form a subsidiary, Siemens IT Services and Solutions in South Africa.

DoL wanted to investigate whether this presented options to terminate the contract, given the licensing platform, and to investigate what penalties might be incurred by the DoL, and the cost of undelivered services to be claimed from Siemens. He reminded Members that DoL had presented some findings on this to the Committee on 9 February 2011.

The key recommendations from the second report were that full management support had to be provided to the Chief Information Officer, that an exit and transfer plan be prepared, and that a third party should be appointed to provide support to the Office of the Chief Information Officer, and to assist with delivery of the agreement.

Mr Sirkisson outlined the progress on this. Subsequent to the appointment of the new Director-General, IT was elevated to a strategic function, and an internal inquiry was commissioned into the PPP. That had found that there had been a breakdown of relationships between DoL and Siemens, that DoL had lacked proper capacity to manage the contract and that the contract, although it did not specify any deliverable milestones, nonetheless required DoL to make periodic payments. The inquiry concluded that there was an urgent need to capacitate DoL’s IT infrastructure, notwithstanding the limited amount of time to do so. Siemens had 197 IT specialists, but the DoL had only 3 (see slide on “Situational Analysis: Capacity” for further details). The Director General and senior management had held discussions with Siemens executive on the relationship breakdown, and a task team comprising representatives from both organisations was appointed.

The capacity problems at DoL had now been addressed, and there had also been attention paid to how DoL would deal with IT systems after the PPP came to an end. Systems were slow and unreliable, partially because Siemens service had severe shortcomings, but also because DoL had failed to specify what business processes had to be automated. This required an entire systems review, which had now been completed. Outdated infrastructure had been identified. Siemens was contractually obliged to replace 50% of the hardware, and the remaining hardware must have at last a two-year useful lifespan. The total recapitalisation of infrastructure would have been too costly within the PPP, and this had therefore been postponed to a time when the DoL had finalised its ICT strategy after the PPP ended.

Mr Sirkisson said that a finding common to all reviews and internal inquiries had been the need to capacitate DoL. However it would be a lengthy and therefore not viable exercise to try to build internal capacity without using outside specialists, and options for hiring service providers had been considered. After consultations with State Information Technology Agency (SITA), National Treasury, and the South African Revenue Service (SARS), the firm Accenture was identified, as it had previously helped the SARS with its ICT turnaround strategy, when SARS was faced with similar issues. The Director General decided to use National Treasury Regulation 16A6.4 – one meant for emergency situations – to appoint Accenture, without the need to go to tender. This was done because the DoL was in dire straits.

In the past year, Accenture had attended to, and completed phase 1, which was an analysis of the existing IT requirements for hardware, systems, licensing and automation, in preparation for the exit from the PPP and the transfer to a new service provider. Phase 2 was the development of an ICT strategy post-PPP, and implementation was due to start in March 2012.

Mr Sirkisson noted that Accenture was not a replacement for Siemens, nor was it another PPP partner. The appointment was meant as a temporary “stop-gap”, to assist the DoL in benchmarking the services available in the market, and to isolate what best practice IT solutions there were to assist DoL in developing and implementing the ICT strategy. DoL would follow the normal Treasury Supply Chain regulations if it did decide to appoint another service provider.

The exit plan from the PPP, developed in consultation with Accenture, defined the roles of DoL and Siemens, and specified  the data and intellectual property the DoL needed to take over from Siemens. Details were given of the four work streams in the exit process (see attached presentation).

Mr Sirkisson summarised that the DoL had learnt lessons from this exercise. Firstly, no contracts in future should be for periods longer than five years. DoL would have to ensure that it had sufficient internal capacity to perform effective oversight, risk management and governance of any contract, and there must also be effective contact management to ensure continuous skills transfer. DoL needed to place IT strategically in the organisation. The right partners needed to be identified, and they should work in healthy competition, to deliver results-based IT solutions

The Chairperson emphasised the need for thorough discussion on this report, and said that the previous Portfolio Committee had not been able to see the shortcomings of the PPP.

Mr Nkosinathi Nhleko, Director-General (DG), Department of Labour (DoL), agreed with the need to thoroughly interrogate what had happened, and use this information to formulate a strategy for future operations. The PPP contract was the most pressing issue that he faced, on his appointment.

Mr A Williams (ANC) argued that the R1.9 billion had effectively been wasted. He asked what action the DoL would take against officials who concluded this PPP agreement with Siemens.

Mr Nhleko cautioned against the suggestion that the PPP failed to deliver at all. If there were allegations of corruption, these should be laid with the proper authorities. The DoL had audited the spending of the R1.9 billion and the spending appeared to be in line with the contract.

Mr D Kganare (COPE) asked about the role of the State Information Technology Agency (SITA). He felt that it was misleading to describe service providers like Siemens as “partner”, because they were pursuing a capitalist philosophy based on promoting self-interest. He questioned the viability of the DoL’s objectives to achieve skills transfer, commenting that there was high staff turnover, especially amongst staff who had received training.

Mr Sirkisson said SITA was involved with the PPP from its inception. It was still working with the DoL, and SITA representatives sat on the steering committee that managed the PPP. He added that even though most IT personnel in the DoL were contractually employed by Siemens, DoL would retain some of them after the contract ended, as it could not afford to lose all intellectual property.

Mr A van der Westhuizen (DA) asked who the new Chief Information Officer (CIO) would be.

Mr Sirkisson noted that an appointment had been made, but the identity of this person could not be disclosed as the contract had not yet been signed; the post should be occupied from 1 April.

Mr van der Westhuizen questioned why it was necessary to use emergency Treasury regulations to appoint Accenture. DoL had known of the expiry date of the contract for ten years and should have planned for it.

Mr van der Westhuizen asked for the estimated cost of the Accenture contract, and the budget allocation for the  new service provider.

Mr Sirkisson said the cost for the first phase of the Accenture process was R2.7 million, while the second phase would cost about R8 million (still to be finalised). The budget provisions for PPP in this financial year was an estimated R120 million.

Mr van der Westhuizen asked if Dr Iqbal Surve was a director at Siemens.

Ms Lerato Molebatsi, Deputy Director General, DoL, said that she thought Dr Surve was a director at Sekunjalo Holdings.

Mr van der Westhuizen noted that Accenture was an agent for some software and asked how potential conflicts of interest were avoided.

Ms Lerato Molebatsi, Deputy Director-General: Corporate Services, DoL, made a general comment that the PPP was put in place because Information Technology was not viewed as a primary DoL mandate, and for this reason National Treasury advised DoL to outsource the function. However, it was not simply a case of blaming Siemens for everything that went wrong. The DoL should have played a better role in monitoring. The R1.9 billion needed to be placed in context; she stressed that this amount represented ten years of work, and when broken down into cost-per-year, it was not excessive and was similar to the IT spending of many other government departments.
Mr S Motau (DA) insisted that Accenture was being employed to do what the PPP should have done, and this was why he regarded the R1.9 billion as wasteful expenditure. He also cautioned that when due processes were not used, this presented opportunities for corruption, so the DoL bore the onus to convince this Committee that there was no corruption. He asked about the current IT capacity within the DoL, noting that another contract, requiring monitoring and contract management, would seem to be needed after completion of the Accenture arrangements.

Ms M Molebatsi (ANC) noted that the presentation document showed that there were three IT specialists currently employed directly by the DoL.

Mr Nhleko disputed the suggestion that the corrective measures taken, under Treasury emergency regulations, to deal with the DoL’s IT problems, posed the risk of corruption. He emphasised that the DoL faced severe capacity constraints that had prevented proper management of contracts and effective monitoring. If it was assumed that there was any corruption, this would merely divert the DoL from its path of investigating and finding corrective measures. He noted that the DoL could not act on a mere assumption of corruption. Any allegations of corruption would first have to be substantiated before being investigated.

Mr Motau said that he was not attempting to imply that DoL officials had in fact been corrupt, but was trying to understand why DoL thought it necessary to resort to using emergency Treasury regulations. The PPP had already been in existence for ten years. The fact that there was “suddenly” an emergency raised questions in his mind.

The Chairperson asked Members to refrain from further discussion on the contractual terms of the PPP. The issues had been closed. If Members wanted to reopen the questions, and if they thought that there was reason for investigate or arrest any officials, then they must substantiate it. He asked that the Committee focus on issues that required correction, such as the alleged overpayments and the recouping of such amounts.

Mr E Nyekembe (ANC) noted that the PPP could have been affected by Siemens unbundling its South African operations. He wondered how this could be avoided in future contracts with other service providers. He also noted that the “poaching” of staff needed to be addressed.

Mr Sirkisson said the unbundling of Siemens had led to the holding company asking the DoL to cede the contract to its local subsidiary, but DoL did not pursue that option. In regard to staff, he stressed that IT was a dynamic industry with high staff turnover, and the DoL needed to consider more ways of retaining staff.

The Chairperson reminded members that the problems with this PPP were discussed a year ago, under former Chairperson Ms L Yengeni. The problems were obvious to all Members, but the Committee now needed to focus on finding solutions for the future. He cautioned against putting blame or pressure on the current administration, and noted that it had been a Cabinet decision to pilot the PPP in the DoL.

The Chairperson asked the officials to ensure that the legal services team in DoL must look closely at the relationships with Accenture, Siemens and any other partner.

The meeting was adjourned.


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