30 Day Payment of Contractors / Suppliers by Departments: briefing by Department of Performance Monitoring and Evaluation

Meeting report

The Chairperson welcomed those present. The issue of payment to service providers might seem to be simple, but the Committee received many complaints on this issue, especially from small, medium and micro enterprises (SMME). The matter had even been escalated to the President, who had made a mention of this in the State of the Nation Address. Section 38 of the Public Finance Management Act (PFMA) listed the responsibilities of accounting officers. This included effective measures to settle accounts timeously. Provinces were not paying their debts due to poor billing from municipalities, which created problems for local authorities. SMMEs were going under, as their resources were not sufficient to sustain them. It was government policy to encourage small business.

Department of Performance Monitoring and Evaluation (DPME) presentation
Mr Sean Phillips, DPME Director-General, introduced the delegation. There was a joint project with National Treasury to address the issue of payments.

Mr Phillips said that a detailed report had been submitted. It was a legal requirement for Departments to pay within 30 days of the receipt of a valid invoice. This was prescribed by the PFMA and NT regulations. Failure to do this constituted financial misconduct. Until recently, there had been strong anecdotal evidence of non-compliance with this instruction. DPME was providing reports to Cabinet and provincial premiers. In order to monitor adherence, NT issued an instruction in November 2011. This was Instruction Note 34. It required national and provincial departments to submit reports to NT and the respective provincial treasuries monthly, covering the number of invoices and the value thereof more than 30 days overdue, with reasons for late payment. A tracking process must be followed.

Mr Phillips said that reporting was to start in January 2012. It had taken some time for departments to adhere to the instruction. There was a spike in March due to a peak in spending. Another interesting thing was that there was an apparent decrease during the year, but there might be a cycle at play. There was an increase in unpaid invoices towards the end of the calendar year. The figures presented went up to December 2012, but recently received figures showed an increase in unpaid invoices for January and February 2013. The levels might be lower than in 2012, however.

Mr Phillips demonstrated how the value of outstanding invoices followed the same trend as the number of invoices. There had been a spike in November due to increased spending by the Department of Correctional Services.

Mr Phillips showed the trend with provincial departments. There the spike seemed to be in April, possibly due to payments being held back until the new financial year. The trend was flatter than for national departments, indicating that the national departments were following the instruction more closely than the provinces. In terms of value there were spikes in January and March, but otherwise the values remained fairly even.

Mr Phillips showed a breakdown for each province. Mpumalanga had performed particularly well both in terms of the number of invoices and the value thereof.

Mr Phillips said it was clear that there had been some improvement, but the average showed little difference. There was a cyclical phenomenon at national level. Limpopo and the North West consistently reported a high number of late payments. Mpumalanga seemed to be the best performer. The province indicated that the legislature was monitoring the issue closely, and was exercising oversight. If Heads of Department (HoD) paid attention to the issue, then the problem could be solved.

Mr Phillips said that the Department of Transport (DoT) had made a significant improvement. A total of 1 143 invoices to the value of R6.5 million had been reduced to zero by December 2012. He singled out four other national departments, but none of these had regional offices. Part of the problem might be delays in processing between national and regional offices. Five departments were mentioned which were still lagging. These departments accounted for a large portion of the national budget.

Mr Phillips listed the reasons for late payment as provided by the departments. The ten most frequently cited reasons were incomplete supplier banking details, which DPME and NT felt was not a valid excuse. There were cases of late submission of invoices, but this was an internal problem. Internal capacity was lacking. There was inadequate cash flow management, also an internal financial problem. Integrated technology (IT) systems might be down due to system overloading, but the whole of government used the same systems. Some had paid their invoices on time despite occasional service interruptions, and others not. A day or two of downtime should not hinder payment within 30 days. Standard Chart of Accounts problems should not affect payment. Departments said that tax clearance certificates were found to be expired when the time came for payment, but this should be managed internally. Managers were not approving payments timeously due to leave or other commitments, which was a clear internal problem. Officials should not be allowed to go on leave with unfinished business. Another reason was discrepancies in invoices. The reporting should be on valid invoices, and where there was a problem with the invoice itself it should not be included in the report. Good contract management should ensure that invoices were valid. The tenth of the most popular reasons was that supply chain management (SCM) processes were not being followed. Where there was a legal contract the invoice had to be paid even if there were problems with the SCM process.

Mr Phillips said it was clear that most problems were due to weak internal administration. The anecdotal evidence was now being confirmed. There was a clear understanding of the key causes of the problem. Some departments were making no progress, but the Departments singled out and the province of Mpumalanga showed that the problem could be solved. A standard work process should be put in place. Responsibility should be allocated to certain managers to ensure that invoices went smoothly through the required procedures. For example, no invoice should remain on an individual's desk for more than three days. This might seem to be a mundane administrative issue, but it was a strategic issue as long as the problem of late payment remained unsolved. A workshop would be held with Chief Financial Officers (CFO) of all national and provincial departments. Those performing well would be asked to share their secrets with their colleagues.

Mr Phillips said that there was a legal framework to deal with financial misconduct. Disciplinary action should be taken where warranted. If the supervisor of the guilty party took no action, both should be taken to task by the accounting officer for that department. The existing legal system was sufficient, but had to be applied more regularly and efficiently.

Mr Jayce Nair, Chief Director: Governance Monitoring and Compliance, NT, said that the PFMA Section 81 specified that non-payment of invoices was grounds for charges of financial mismanagement. Because of the lack of consequences at present, progress on paying invoices within 30 days was being halted. He had listened to a show on a talk radio station where suppliers had complained that invoices were being “forgotten” in drawers, and officials had to be bribed in order to process the invoices. Inadequate cash flow was also cited as a reason. Where goods or services were acquired without funds being available, it was a serious transgression of the PFMA. Where SCM procedures were failing, payments to the supplier could not be stopped. Goods and services were supplied in terms of a contract, and payment could not be withheld. NT had a central point which received all invoices and distributed them to various cost centres for payment.

Discussion
Mr J Gelderblom (ANC) said that the situation was shocking. It was a pity that progress was not what was expected. Serious action was needed against CFOs, HoDs and DGs who were amiss in their tasks. The executive should keep this matter as a standing agenda item for their meetings with Departments. National Departments owed substantial amounts to provinces and municipalities. Workshops were good, but were not always successful. He thanked DPME for bringing the issue to the fore.

Mr G Snell (ANC) concurred with Mr Gelderblom. The examples of corruption of officials holding back invoices was a fact, and had to be eradicated. The reporting format should include the results of disciplinary action. Executive members could put punitive measures in place. SMMEs could not survive without payment and were being forced into bribing corrupt officials. The recommendations made should be beefed up and tabled in the House.

Ms A Mfulo (ANC) commented on delays due to incorrect banking details. Errors should be picked up immediately on the receipt of an invoice. The 30-day period should start immediately on receipt. She asked if parastatals fell under this monitoring regime, as some were known to be slow payers themselves. She asked what teeth the DPME had. They were monitoring all Departments, but she was not sure what their role was in enforcing compliance. She asked what role NT played as well. It was clear that there was a challenge. She asked if there were any guidelines to bring people on board who were not complying with the instruction.

Ms Mashigo (ANC) echoed the concerns on small business. The Committee needed to act on the document from DPME. No Minister could then say that Parliament was not concerned. Economic empowerment was being stunted. Other Committees might not be aware of what the mandates of the entities within their oversight domain were.

Mr M Swart (DA) had had his eyes opened. In the Eastern Cape contractors had ceased work due to non-payment. One of the Departments was Department of International Relations and Co-Operation (DIRCO), but they were not mentioned in the report. He asked how they had been faring. He was also concerned about the Department of Public Works (DPW).

Mr Gelderblom added a concern of the Department of Human Settlements (DHS).

Mr Phillips replied that one of the best ways to deal with corruption related to invoices was to introduce the standard work processes and monitoring mentioned earlier. Officials would thus not be able to hold onto invoices for personal gain. He strongly supported the suggestion that the report be tabled in Parliament. Departments should be called to account by Parliament. The data for every Department was in the full report submitted to the Committee. It was important for Departments to raise any problems with a supplier as soon as possible. If a supplier took a Department to court for late payment, there were precedents which indicated that a court would interpret the 30-day period as starting with receipt of a valid invoice.

Mr Phillips said that DPME had no legal basis to take punitive measures. There was a strong and elaborate legal framework already. Accounting officers were responsible for such actions. Changing the framework would be complex, as several Acts might have to be amended. There could also be accountability concerns. There were reasons for the current legal structure, such as making executive authorities and accounting officers responsible and empowered. The current system should function better rather than be modified.

Mr Phillips said that there were as yet no guidelines for the payment of invoices. The workshop would address the issue. Basic processes were needed, and DPME assumed that departmental officials should have the competency to put such process in place. The sustainable solution was for Departments to put their own internal monitoring process in place. The situation would only improve when Departments did their own monitoring. The Departments doing well were following a management process. This should be a basic management function for CFOs and SCM officials.

Mr Nair added that the information in the report was only for national and provincial departments. Parastatals were not included. Information for municipalities was included in the quarterly reports. It seemed that DIRCO and DHS were generally compliant. NT had an enforcement strategy, and would communicate with those Departments that were not complying, and point out where transgressions were occurring. If the response was not positive the matter could be elevated. It might be necessary to make an example of some officials guilty of financial misconduct.

The Chairperson said that the Committee needed the information for the previous year. Parliament would not necessarily need the full details, but an indication of the serial offenders. This would assist Members in their oversight. He noted the performance of Mpumalanga. Generally he was not sure how the monitoring was done. He asked if there were unannounced visits. There was a lot of SCM activity in Mpumalanga, as there was in other provinces. Invoice payment was an agenda items on the executive meetings in that province. Provinces had their different areas of strength. He asked how government could ensure that the correct thing was done. The Presidency was taking the issue seriously. He had not been aware of the provisions of Section 41 of the PFMA. The Public Service Act was also relevant. Supervision was still needed despite the legislation being in place. The Auditor-General had been strong that people were not doing the work expected of them. Failure to comply with performance agreements had no consequences, and bonuses were still paid out. He found it difficult that NT had to do the monitoring when the DGs should understand what was expected of them. He asked where the gap was. CFOs should not have to be persuaded to do the work they were paid to do.

The Chairperson said it was now up to Members to take the report further. The legal framework was in place. It was not just SMMEs going under, as even some big companies had closed their doors due to non-payment. Parliament needed to ensure that this did not happen. The culprits had to be identified. He noted that the reports had been distributed to the Departments. Some people had approached him with claims of outstanding invoices dating back to 2005. He asked for another explanation on the concept of an invalid invoice.

Mr Nair replied that where the banking details were incorrect, the Department should have a database of suppliers' banking details. These might be changed without the Department being informed, and only come to light when payment was attempted. There could be errors on the invoice such as details of what was supplied. In such a case the invoice was returned to the supplier, and the 30-day clock only started ticking when the corrected invoice was supplied.

Mr Phillips confirmed that all the information was shared with DGs and provincial HoDs. DPME had presented across a range of management issues. The results had been presented to the Committee, indicating a number of non-compliance issues with basic administrative procedures. A detailed report should be completed by July 2013, but the preliminary findings were of little change from the previous year. Basic administration had to be improved. It would be useful to do an age analysis of the outstanding debts. NT had not yet made such a request.

The Chairperson said that the Committee now had the information. This would be a challenge in its oversight role. The difficulty was that some SMMEs depended on government contracts, and might fear losing business if they reported late payments and corruption. Negligible amounts added up. The Committee had received reports from provincial health organisations. Payments were being deferred to the following quarter due to the non-availability of funds. This had been reported in Parliament. This was a time bomb and had to receive attention. It was public knowledge that Gauteng had R2 billion outstanding. There was a similar situation in the Free State. An outstanding question was if every Department was being monitored. He agreed that the management performance assessment tool should assess the control over invoices.

Mr Phillips replied that all 156 national and provincial departments had to provide their statistics. One of the management standards was the issue of payments to suppliers. This standard prescribed what should be done at the various levels. At level four, the Department should have tracking systems in place, and management should investigate the reasons for non-payment. Only 5% had reached this level. There was continuous engagement with Departments. Officials at many were trying to improve their ratings and were moving towards level four.

The Chairperson asked that the reports be made a part of the quarterly report to the Committee. It would help in their work.

Study Tour update
The Chairperson said that the House Chairperson was expecting to meet with the Speaker the following week. No problems were expected with the application.

Minutes of Meetings
The Chairperson noted that Members had not received copies of the minutes of previous meetings sufficiently in time for the meeting. Approval would be held over to a subsequent meeting. He asked Members to read the version which had been distributed by e-mail. This was for meetings in February, March and April. Ms Mfulo noted the minutes for February had already been approved.

The Chairperson said that hearings on the Appropriations Bill would be held. He asked Members to indicate which Departments should be invited. Five Departments were put forward.

The meeting was adjourned.