State Procurement System review to ensure value for money: National Treasury update; Anti-Corruption Unit: DPSA update

Public Service and Administration, Performance Monitoring and Evaluation

28 August 2012
Chairperson: Ms J Moloi-Moropa (ANC)
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Meeting Summary

National Treasury presented the progress made with the review of the State Procurement System to ensure value for money. Several measures had been introduced to counter Supply Chain Management (SCM) related fraud and corruption. A Multi-Agency Working Group (MAWG) had been established by the Minister of Finance to investigate fraud and corruption in Public Sector SCM processes. The Working Group was chaired by the Accountant General, and had representatives from National Treasury, the South African Revenue Service, the Financial Intelligence Centre, the Auditor-General, the Department of Public Service and Administration, and the Special Investigating Unit.

Breaches of the SCM included procuring outside of transversal term contracts; the manipulation of evaluation processes; acceptance of sub-quality products and/or services at inflated prices; cover quoting, conflicts of interest, bribery and fronting, by-passing SCM prescripts; and using expansions and variation of orders that are far in excess of original contract prices. These breaches of Supply Chain Management were happening on a daily basis. Several possible solutions had been identified and some were already being implemented. In addition, the SCM regulatory framework, which formed part of the Treasury Regulations, was in the process of being reviewed.

Members asked if Treasury had the capacity to implement these measures and when they would be implemented. They asked if the proposed system was flexible enough and realistic enough to be implemented properly, and what kind of support and oversight would be provided to the provinces. Many expressed concern about the lack of repercussions for wrong-doing, or the long delays in making these repercussions felt. The Chairperson emphasized the importance of working in collaboration with other Departments.

Due to time constraints, the briefing by the Department of Public Service and Administration on the role and responsibilities of Anti-Corruption Unit was postponed. However, the
Director General gave a brief introduction, with the view to providing more detail at a later date.

Meeting report

National Treasury update on review of State Procurement System to ensure value for money
Mr Freeman Nomvalo, the Accountant-General of the National Treasury, introduced those present from the National Treasury. He began by saying that there was a dispensation in the country that once the programme of government had been decided, the dispensation went through a process of allocating funds. There was a responsibility for each of those spending agencies to account for those spending activities and the manner in which they were carried out. Within each spending agency there were people in authority, such as the Minister, the Deputy Minister and the Director General. These people were the first line of defence when it came to proper utilization of resources. Then there were the Committees and the Treasury involved as well. The role that Treasury played could be strengthened if each of these actors acted responsibly and held people accountable.

The measures that Treasury put in place relied heavily on that dispensation being done properly. This would of course still need to be monitored and reported on, but this was a collective responsibility and could not be done by Treasury alone. All structures of government should work collectively towards this, and Mr Nomvalo urged the Committee to spread this idea throughout government.

The area of procurement was the main area of government that was being looted. Even though South Africa had limited resources, the country was able to mobilize resources within the country. However, if things continued at the rate they had been doing, then the country would get to the point where it was no longer able to do this. The problems of this nature were very difficult to detect at the early stages, but it was progressively worsening and would get to that point if not stopped. The measures that Treasury was proposing should be viewed with this in mind. All structures of government should work together to ensure that the state gets value for money and that all funds were spent appropriately.

Mr Nomvalo handed over to Mr Henry Malinga, Chief Director:
Supply Chain Policy of the National Treasury, who presented the progress made regarding the review of the State Procurement System to ensure value for money.

Mr Malinga began by explaining that several measures had been introduced to counter Supply Chain Management (SCM) fraud and corruption. A Multi-Agency Working Group (MAWG) had been established by the Minister of Finance to investigate fraud and corruption relating to Public Sector SCM processes. From that work, two sub-working groups were established to focus mainly on preventative measures and on enforcement respectively. The group dealing with preventative measures was focusing on enhancing regulatory measures and compliance monitoring; strengthening oversight; and procurement reforms and systems priorities.

The Multi-Agency Working Group was chaired by Freeman Nomvalo, the Accountant General, and was represented by the National Treasury, the South African Revenue Service, the Financial Intelligence Centre, the Auditor-General, the Department of Public Service and Administration, and the Special Investigating Unit.

The nature and extent of the SCM breaches were discussed. Breaches included procuring outside of transversal term contracts. These contracts were contracts procured as a strategic commodity which were necessary for more than one department. This ensured that the government could benefit from economies of scale and from standardization. If each Department were to have separate fuel contracts or vehicle contracts, for example, then this would be unnecessarily complicated. However, some procurement entities were procuring outside of these contracts, which resulted in extra expense and irregularities. Other breaches included the manipulation of evaluation processes; acceptance of sub-quality products and/or services at inflated prices; cover quoting, conflicts of interest, bribery and fronting, by-passing SCM prescripts such as not putting out a tender or following proper processes; and using expansions and variation of orders that are far in excess of original contract prices. Some expansions increased the total cost of contract prices by above 75%. These breaches of Supply Chain Management were happening on a daily basis.

Several possible solutions had been identified. These included enforcing the procurement of goods and services that were available in terms of the Transversal Term Contracts. The introduction of probity on all major contracts could be considered. Probity was an oversight body independent of the evaluation process which would audit the whole process up until the point that the contract was awarded. Before a contract was awarded probity would sign off on it to say that the process had been according to the necessary procedures. It would also be beneficial to strengthen the monitoring function of the Treasuries. All tender awards should be published and made as open and transparent as possible. People should be given an opportunity and avenue to lodge grievances.

Further solutions included enforcing the Code of Conduct and ethics standards on SCM practitioners and Bid Committee members; price benchmarking to be enforced; encourage the enforcement of remedial actions (penalties, litigation, restrictions) on all suppliers that act fraudulently;

The register for tender defaulters and database of restricted suppliers should be used to their maximum capacity to penalize wrongdoing. Individuals or companies should placed on the register for tender defaulters once they had been found guilty of irregularities in court. It required a court order to have someone placed on the register. However in order for this to happen a proper process had to be followed and the defaulters were given 14 days to respond. Often this process was not followed through on. The database of restricted suppliers as comprised of names sent to the National Treasury if suspected of wrong-doing. Again there was a process involved to ensure that they qualified for this censure. No restricted companies should be offered any government contracts

Mr Malinga then turned to look at national initiatives to enhance value for money. Preferential Procurement Regulations took effect on 7 December 2011. These regulations aligned preferential procurement with the aims of the B-BBEE Act and its Codes of Good Practice. A guide on the regulations and revised Standard Bidding documents had been issued to assist Accounting Officers / Authorities with the implementation of the regulations. Instruction notes had been issued on five sectors identified by the Minister of Trade and Industry, for local content in terms of those regulations.

Treasury required that procurement include a certain amount of local content. Certain sectors had designated%ages of local content that had to be fulfilled. For example, with buses, 80% of the bus body had to be locally sourced. Textile, clothing leather and footwear had to be 100% sourced within the country, as was the case with steel power pylons. Canned or processed vegetables had to be 80% locally sourced, and rail rolling stock had to have at least 65%. An instruction note on set top boxes of 30% was in the process of being issued.

The SCM regulatory framework, which formed part of Treasury Regulations, was in the process of being reviewed. This review included the identification of provisions in all instruction notes, circulars and guidelines considered regulatory in nature for elevation into Treasury Regulations. Provincial treasuries were giving inputs and the regulations would then be published for public comment.

Several measures had been introduced to enhance compliance monitoring and improving transparency and accountability. Institutions were compelled to submit annual procurement plans and monitor performance against those plans. Names of Directors had to be verified against staff structures to ensure that there were no conflicts of interest. All bids awarded had to be published, and suppliers had to be paid within 30 days.

Outside of the procurement environment, other initiatives were underway which also had a direct impact. The Broad-Based Black Economic Empowerment Amendment Bill and the Draft Amendment to the Broad-Based Black Economic Empowerment Amendment Act’s Codes of Good Practice would both change regulations if they came into practice. Treasury was working to ensure that the public was not confused by these changing initiatives.

Looking forward, the National Treasury was in the process of appointing the Chief Procurement Officer, and the process would be finalized shortly. The purpose was to establish an office that would modernize the state procurement system to be in line with the prescripts of the Constitution; ensure transparent utilization of resources for improved service delivery; and exercise sound stewardship of government assets and resources.

Mr Nomvalo gave several examples of how inflated prices could get. Government had paid more than R500 million for a contract in one of the Provinces which was valued at R61 million to government. Another contract for a small activity had initially been priced at R60 million. Six months later, after a number of revisions and variations the cost had inflated to R300 million before work had even begun on the project. A road had started off costing R50 million and had been raised to R150 million. It was clear that those who made decisions needed to take more care in doing so.

He also gave examples of the work that the MAWG was doing. There were two subcommittees dealing with enforcement and systems respectively. They had also established a third committee which was established and ran with a program in the Eastern Cape. A team of people, partly from private sector, had been tasked with trying to understand what was happening on the operation side while the work was going ahead. They worked to improve the systems in place. They had recently made a presentation to Treasury and were making good progress and coming up with good recommendations. There was an extension of this to Limpopo as well. The idea was to implement it in these areas and then take the model to other areas of the country. 

The suggestions that the committee was making were very basic and simple to change. Often the suggestions they made were included in the regulations already, but were not being implemented. There was a need to bridge the gap between good regulations and the implementation of them on the ground. The committee was comprised of people who had never worked in government and who had not been involved in writing the regulations. This was to avoid people on the committee trying to justify the regulations that they wrote. 

Discussion
Mr D Du Toit (DA) asked about Treasury’s concern that conditions needed to be met. He said it seemed that they had an idea of the direction in which they were headed but he was worried that they did not have the capacity or the manpower needed for implementation. It was a substantial organization and would need a lot of highly trained people to get involved as quickly as possible. He asked how widely it would be implemented.

Mr Nomvalo responded that as work came up, Treasury would assess capacity. They were looking into the functions that needed to be performed, how many people were needed and whether there were any gaps. The aim was to build a system that worked. There would be budgetary implications, but as they did the analysis, these would be taken into account. The Director General was present and understood the importance of this matter. Structures were already in place. Now what had to be asked was whether the system required those kinds of structures, and how they could be adapted. This could result in increased or less efficiency.

Mr Malinga added that Treasury was not reinventing the wheel, a monitoring process was already in place. This was just an effort to strengthen the process. There was existing capacity that just needed to be strengthened.

Mr Du Toit expressed his concern that sanctions or rectifying steps took too long. Once a wrong-doer was found guilty by a court then it was placed on the register but this was often a slow process. He worried that the system was being clogged up. He asked what the budget was, commenting that it must be substantial. How would it be extended to local government level? Procurement at municipalities was a landmine-infested field.

Mr Nomvalo responded that this was a broad problem, and a lot of the questions that had been brought up came back to that. There must be consequences for wrongdoing. Even though there was a regulatory framework with consequences outlined, sometimes they were still not implemented. The system of justice took a long time as it was necessary to go through a proper investigation to establish criminality, and then still hand over to the prosecution process to evaluate if this was a sensible conclusion. This would be time-consuming and may not end in results. Therefore interventions were needed at a different level. Even then challenges remained, for example there was often unwillingness on the part of those in authority to discipline. It had often happened that the Accounting Officer would take action and this would later be reversed by other authorities, which undermined the whole process. Whether guilty or not guilty, the process must still go ahead so that this could be established without a doubt. Despite this, it still happened that staff would be criminally charged and then the only repercussion would be to be redeployed to another department. This should not happen. 

Another problem slowing down the system of accountability was the legislation, particularly the Public Service Act. It was a good piece of legislation, but the process described there delayed the outcome of disciplinary processes. If the Head of Department made a decision to deal with a bad service provider, it was important to get that provider out of the system as quickly as possible. It would be preferable to be able to remove them first, and then go through the processes. In the private sector, for example, a CEO could remove a manager immediately. Treasury understood the rationale behind the Act but the problem that came out of it was that there was an inherent delay in the process. It could even serve to derail the process, rather than just delaying it.  He asked how accountability could be assured. While there was a good regulatory framework, if it did not get implemented, then it was useless.

Ms M Mohale (ANC) commented that it was easy to get stuck in planning mode without implementation ever taking off. She asked when Treasury envisaged this taking off in local, provincial and national government.

Mr Nomvalo responded that many of the solutions being discussed were already being implemented, such as the publishing of tenders and providing information on directors. Procedures were in place and now must be used. Procurement was taking place all the time and implementation was taking place alongside it as the process went along. Money had already been saved by these measures.

Mr Nomvalo responded that introducing changes of this nature could be frustrating as the positive impact would only be felt in months and years to come. The negative effects being felt at this time were a result of bad decisions made in the past. The repercussions were much delayed. However, monitoring was in place to see if behaviours started to change.
Chief Procurement Officers (CPOs) could also help to strengthen that function. 

Ms Mohale asked if there would be a regulation with repercussions for procuring outside of transversal contracts and how long this would take to implement. This was something that Departments did on a regular basis, how could this best be controlled?

Mr Nomvalo responded that there were regulations about transversal contracts, but that they had escape clauses for “unlikely events”, such as finding a better price. However, almost every time there was a deviation from transversal contracts, it was not for a valid reason. Section 38 required that Accounting Officers put in place accounting systems which recognized values such as equity, fairness, transparency, and cost effectiveness. In the case that transversal contracts were deviated from, it was still expected that these values be upheld, but this was rarely happening. 

Ms Mohale asked how Treasury would trace local content. 

Mr Malinga added that it was acceptable to source materials from outside the country if it was not possible to get them from within. If raw materials were imported and then assembled in South Africa, for example, then this still added value.  Treasury recognized that not everything was available inside the country. The Department of Trade and Industry was monitoring these deals.

Ms Mohale asked how realistic price benchmarking was. It would be difficult to expect provinces to be able to purchase products at exactly the same price from one place to another. In a capitalist country there was always competition to offer better prices. How would Treasury enforce this.

Mr Nomvalo responded that there was not a set price but a set price range. Basics were not being adhered to. For example, in one case in Limpopo it was found that boxes of water being delivered only had water bottles on the top layer and were empty below that. It should not be necessary to introduce regulations to enforce simple steps like checking deliveries. These examples illustrated the need for change in culture. The change would only happen if people were being disciplined. There needed to be an increased trust in the legislation and in the process. 

Ms J Maluleke (ANC) asked about the role of consultants, who would often do the job but also be part of giving advice. How was this classified in terms of procurement?

Ms Mohale noted that the presentation stated that institutions should submit annual performance plans, which they would be monitored against. If something was not included in the procurement plan but was essential what would happen?

Mr Nomvalo responded that if there had been a procurement plan and then a machine had broken down, the machine would need to be replaced to maintain service levels. Money could be reprioritized, or alternatively there was the option to request more money, as the legislation did make provision for unforeseen events. Flexibility was already built into the system. It was important to be flexible but at the same time flexibilities could be exploited and often were. Exceptions became the rule.  80% of procurement should be properly planned. If that type of benchmark was set, then the Accounting Officer would know that there was a problem if there was too much unplanned expenditure. 

Mr Du Toit asked about the 30 days in which payment had to be made. Were procedures in place for long running projects which would involve several part payments?

The Chairperson noted that it had been a depressing presentation, but that she had sincerely appreciated the information. These challenges were ones that everyone had to address. Mr Nomvalo had said that they all had to do their bit, and she agreed that there was a need to activate all institutions and everyone else.

She brought up the issue that often when departments presented, it arose that departments did not really work together, or that collaboration was generally not a priority. This was a worrying factor, as departments were losing out in terms of collaborating on areas where they could do so well. Leaders of clusters needed to come and outline cluster programmes and encourage departments to work together, collaborate and share resources. She was glad to see that the presentation that day had mentioned some collaboration but more should be happening. Corruption in the public service was killing government. It was imperative to come together as Committees, and work together to deal with these matters.

Mr Nomvalo responded that Treasury had been involved in a lot of collaboration, particularly in relation to capacity building. They had been working with DPSA on skills assessment across all of government, and also on the nature of the Chief Financial Officer structure, amongst other projects. In this case they could bring the technical knowledge to assist DPSA. In the Limpopo investigations there had also been a large amount of cooperation with the DPSA. So they were increasing cooperation although Mr Nomvalo agreed that there was more room for improvement. They had shared tools for developing the assessment capacity of the Department, in terms of financial monitoring, with the Department of Performance Monitoring and Evaluation.

The Chairperson said that a second problem was that the consequences of wrong-doing were not being felt. Management was not tight enough and so South Africa was becoming a “helpless state”. She was glad to see that the problem of consequences had been identified in the presentation and that this was going to be brought up at the Summit.

The Chairperson asked if blacklisting companies was really effective, as she had heard of many companies dodging this by changing their name. 

Mr Nomvalo responded that the changing of names had been a problem, however, they were now taking not only the names of the Company but also the names and ID numbers of the company owners and directors so that they could be tracked if blacklisted. One of the challenges was that before that database was pulled together, people who were blacklisted in a province, could still be awarded a national contract as the databases were not centralized. Now everyone had access to all information.

There were cases of restricted companies paying a bribe in order to continue to work for government. This was unacceptable as there should be equal opportunity for the rich and the poor. If companies were able to pay their way out of problems then there was something wrong with the way the justice system had been crafted. It should therefore be a different process and different people who removed companies from the restricted list.

The Chairperson also mentioned that government tended to be very dependent on consultants, who therefore held a lot of information and were often the source of leaks or weaknesses in the system.

She said that government needed to accept that this was a major challenge, that people were not afraid to steal from government and that there were many civil servants who hated government.

Ms Mohale asked if Treasury planned to assist the municipalities in their Supply Chain Management. Or if they did already, how they were going about that.

Mr Nomvalo responded that there were many ways in which they were assisting municipalities. They supplied expert knowledge, and had also taken steps to address the issue of the shortage of skills. There was an intensive programme where municipalities could employ interns, thereby addressing the issue of shortage of skills and providing future employees. In addition Treasury had been able that year to take three employees from different municipalities to do a two-year master’s programme in Jamaica. Their research was based on municipalities. Treasury was looking at raising funds through the EU for similar, local, capacity building initiatives. They also worked with provincial treasures to improve financial management. For those provinces in really deep trouble, they would assist them in forming a recovery plan. Those provinces that took these initiatives seriously did turn around. However, there was only so much one could bring from outside. The right attitude also had to be there.

The Chairperson thanked Treasury for their presentation and requested that they stay on for a brief discussion of the Anti-Corruption Unit.

Public Service and Administration on role and responsibilities of Anti-Corruption Unit
As time was running out, the Chairperson requested that the Department of Public Service and Administration give only a brief sketch of the anti-corruption unit, and suggested that they scheduled an anti-corruption meeting to deal with the issues in depth.

Mr Mashwahle Diphofa, Director General of the Department of Public Service and Administration, remarked that he would give a brief overview of those issues he would have wanted to raise. The first of these was that of delegations. In his opening remarks the Accountant-General, Mr Nomvalo, had indicated an inability to deal with matters related to the system because the authority lay elsewhere. The DPSA had developed a delegations framework which specified that these were the issues around which the delegations should focus.

Mr Diphofa also brought up the Department’s work in terms of structure. The Department had done a lot of work looking at the provincial structures. Each province did similar work, so there was no need to have radically different structures.

He emphasized the human element. One could refine regulations as much as possible but if staff were determined to find a way to commit wrong-doing they most likely would. More lower-level staff were involved in financial misconduct than more senior members. The trend was already there from early on. In addition, often people had the authority to punish but chose not to, this made them liable as well.

The Committee had asked the department to talk about its role and responsibilities with regard to the Anti-Corruption Unit. This had so far been in line with the requirements from government and had gone through the correct processes. There was a need to clarify the roles and relationships between the two bodies. Therefore a committee had been established comprising members of DPSA and of the National Treasury. The recommendations of the committee would be taken to the Executive Authority, who would consult with the Minister of Finance, and finally approach Parliament. All the work had been done in terms of structure, clarifying relationships and so on. All that had to be done now was to finalise consultations between the two Ministers. In the mean time the priority was to find resources in the Department so that work could begin as soon as this was sorted out.

Allegations of corruption had been referred already from the Presidential Hotline, the National Anti-Corruption Hotline, and some had been reported directly. The team was already working on establishing relationships with other entities at the Special Investigating Unit. Training and capacity building of anti-corruption practitioners was underway. Thus two strings were at play – finalizing the institutional relationships, while at the same time working in the field.

Mr Diphofa said he would return with a more detailed discussion.

The Chairperson thanked him for the overview.

Mr Du Toit asked how success would be measured. Could it be expressed as a%age? This applied for the establishment of both those measures on SCM and the public service anti-corruption unit. Was it possible to look at the whole scope of problem, and then say they were addressing 80% or 95% of the problem. How could the Department at some point say they were satisfied and were eliminating problems. How would they measure themselves? This was the kind of information that the Committee would be looking for when they presented later on. 

Mr Diphofa said he would respond when returned. There were however a number of indicators which they had set for themselves. These related to issues such as the finalization of cases of financial misconduct. If these are being completed, then it could be assumed that the Department was taking the actions that it was meant to take.

The Chairperson thanked Mr Diphofa and said that the Committee would come back to this matter as it was important to track movement and progress in terms of targets. She thanked everyone for coming and particularly the National Treasury. She said that the Committee would prepare itself thoroughly for a full briefing on the anti-corruption issue.

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