Commission for Conciliation, Mediation, Arbitration: Leases and other issues

Meeting report

Commission for Conciliation, Mediation and Arbitration (CCMA): Leases in Western Cape
Ms Nerine Kahn, Director, Commission for Conciliation, Mediation and Arbitration, gave a presentation on challenges that had been experienced in leasing offices for the Commission (or CCMA) in Western Cape. Ms Kahn explained that delays in the procurement of the Western Cape lease were a result of two problems; firstly that the building had not been fit for occupation, and secondly that a forensic audit had uncovered that the tender had been awarded to the wrong bidder.

Background
The CCMA underwent an open tender process for the lease of new premises and was initially to take occupancy of the building on 1 March 2014. However, there were several problems with the building, such as the lifts not meeting health and safety requirements and the parking being unavailable. These were aspects of the building that had been considered when awarding the tender, and therefore had to be resolved or other bidders would be able to challenge the process. The City of Cape Town issued a certificate stating that the building could not be occupied. The landlord therefore failed to provide beneficial occupation. She explained that this meant that a building cannot be used for its intended purpose and the lessee therefore cannot get the full benefit of what was being paid for.

The existing lease for a building in Darling Street was therefore extended and the CCMA initially attempted to support the lessors in making the new building fit for purpose. However, challenges proved intractable and the organisation had to consider the risk posed to its ability to provide services. It was therefore decided that a forensic audit should be conducted to investigate the cause of the problem.

A significant change of approach occurred after the forensic audit, as it had initially revealed that the tender had been awarded to the wrong bidder. In order to rectify this, an application was brought to the High Court to have the tender award set aside. This decision was taken under legal advice, as four other bidders had said that they would challenge the award of the tender.

The tender for the CCMA Western Cape office premises was awarded to Potlako Investments CC following a competitive bidding process on 7 January 2013. The initial occupation date was to have been 1 March 2014. The successful bidder was to complete specified tenant installation.

The governing body thought it was appropriate to have a forensic investigation because the bidder failed to deliver beneficial occupation as originally or subsequently agreed. There were ethical concerns as the bidder did not meet their commitments as promised on their bid submissions. In addition to the problem with the parking and lifts, there were numerous other concerns. Electricity cables were open and were running with IT cables, which would cause problems with the IT. These kinds of problems suggested that there were not enough skills or experience from the bidders to provide the service. There were concerns that the challenge would continue throughout the ten years of the lease. The lease agreement said that attempts should be made to remedy the breach via the financier, which was Nedbank, but this proved unsuccessful.

The ownership of the proposed building was also not clear. Potlako Investments CC had converted from a close corporation to a private company, and the name changed to Milestone Property Group (PTY).

For these reasons, although the lease was audited by both the Auditor General and the internal auditors, CCMA felt it necessary to get the opinion of an external independent service provider to ensure the credibility and impartiality of the investigation.

Findings of the Forensic Investigation

The forensic investigation made 27 findings. The critical findings included that functionality points were applied incorrectly; there was a perceived Bid Evaluation Committee (BEC) bias in favour of Potlako; the functionality ratings were applied inconsistently; there was not segregation of duties, particularly with regard to the Supply Chain Manager’s involvement; and there was a change in the specifications which was not properly authorised.

The CCMA was required to follow a tender process by which the Bid Specification Committee (BSC) set out the details of what was required, the BEC evaluated the tenders that were submitted, and the Bid Adjudication Committee (BAC) recommended where to award the tender. These committees needed to be independent of one another. However, the findings of the forensic audit revealed that one individual, the Supply Chain Manager, was sitting on all three committees. This meant that he had the opportunity to manipulate the process.

The individual in question was suspended and underwent a disciplinary process. Ultimately he left the CCMA and no settlement was paid to him. There were also findings in relation to other employees. Members of the various committees who were involved in the process were called upon  to explain their actions, and had undergone disciplinary action, retraining and counselling. This process was ongoing. The CCMA preferred corrective action to punitive action where possible.

Financial impact

The CCMA had to incur costs in order to rectify the situation and protect the organisation. The forensic audit itself cost R931 465. Attorney’s fees were paid for the lease contract review, the High Court proceedings, disciplinary proceedings and Labour Court proceedings. The Supply Chain Manager brought an action to the Labour Court, which the CCMA then had to defend. As the matter involved all senior people in the organisation, independent people had to be brought in to perform these roles. The total cost thus far amounted to just under R3 million.

Current situation
Ms Kahn stressed that every effort was made to manage the risk throughout and to ensure that service delivery was not interrupted. There was no indication of corruption by any CCMA officials. As the building was never occupied, the (incorrectly awarded) bidder was never paid any rent.

The High Court application was still in process and was taking longer than was initially hoped. This was a challenge as the existing lease on the Darling Street premises had been extended to November 2015, but once it expired there was nowhere for the CCMA to conduct services. The current landlord was reluctant to extend the lease, because he himself had been a bidder in the tender process. The CCMA was not in a position to tender for a new building until the court case was finalised.

It had recently been discovered that the successful bidder had sold the building without notification. As a result, Nedbank had withdrawn its defence of the court case (costs to rectify) because it had been paid  its dues from the building sale. She hoped this indicated that the landlord would not have an interest in pursuing the matter further.

The process was still ongoing, but the CCMA was attempting to disclose everything to the Committee as honestly as possible and keep Members abreast of any changes. 

High Court application
Mr Cameron Morajane, Head of Legal Services, CCMA, briefed the Committee in greater detail on the High Court application. He said the media had misconstrued the issues and what the CCMA was trying to achieve from the application.

The first hurdle that the CCMA encountered was the conversion of the name and type of company by the successful bidder. This effectively meant that that CCMA was contracted to the wrong people, because the lease was signed with Potlako Investments, not Milestone Property Group. This created contracting problems, but the CCMA chose not to attack the validity of this change because it was trying to move the process forward.

The second issue was that the lease contract became a debate between lessor and lessee about what needed to be improved and installed. The CCMA engaged with the successful bidder to try to reach common ground and be able to occupy the building. An effort was made to assist the bidder to meet the standard that was anticipated in the lease.

On 1 March 2014 the building should have been delivered but it was not. On this ground alone, the CCMA was entitled to take legal action due to breach of contract. The lease contract specified that in the event of a breach of contract the lessee was supposed to serve notice to Nedbank and request the Bank to assist the lessor in making the building fit for occupation. Nedbank did assist, but not to the extent needed to meet the required standard. This was when the investigation was initiated, due to problems related to capacity to deliver on key aspects of the tender.

While the breach of contract was not initially pursued, in the hope that it would be able to be sorted out, the CCMA had decided to follow that ground following the forensic investigation.  The Constitution of the Republic states that the procurement process must be fair and competitive. In this case, Treasury regulations were not complied with, and there was no fair competition. The governing body therefore took the decision that it was appropriate to set aside the lease.

The application to the High Court sought to have the decision and recommendations made by the bidding adjudication committee, awarding the tender to Potlako, set aside.

It was important to note that this was not a breach of contract application and no financial remedy was being sought. There were no counter applications, and Nedbank had withdrawn from the application.

The application was still in the exchange phase as parties were still exchanging documents. The hope was that it would take one year, but this had not happened and the process was still ongoing.

There was no obligation to pay the rent because of the court application, so there was no expenditure by the CCMA on this front. The existing lease had been extended to cover the process of litigation. The lease would end in November 2015, but there was no end in sight for the court process, so the real danger was that by December there may be no venue to house the Western Cape Office.

If the application to the High Court was unsuccessful this would not mean that the CCMA was liable for any money up front, but it would be sitting with a binding lease contract for the next 10 years. There was no breach that the CCMA had committed.

Labour Court proceedings

The Supply Chain Manager had gone to the Labour Court in an attempt to have his suspension set aside, alleging that he had been discriminated against. Legal expenses therefore had to be incurred to defend the CCMA. The CCMA felt that his suspension was a rational and fair decision, and the Court found this to be the case, and thus set aside his application.

As the disciplinary process progressed there were no fraud allegations, but the individual in question asked to be released from his contract. There was no settlement reached and no money changed hands. He resigned and ended his employment with the CCMA in March 2015.

Internal controls

Ms Ntombi Boikhutso, Chief Financial Officer (CFO), CCMA, spoke about the internal controls that management had strengthened as a result of the findings from the forensic audit. Several recommendations had been made and implemented and were being practised. Some of the key internal controls were that different supply chain officials should serve on each bid committee. While supply chain officials were regarded as experts from whom committee members sought guidance and advice, the committees should not depend on them entirely, but also take responsibility and apply their own minds. The CCMA had developed a check list in line with National Treasury regulations to ensure that processes were followed. Continuous training would also be done with bid committee members and supply chain officials. The entire organisation would be workshopped on understanding the supply chain and the implications on their actions for the organisation.

Discussion

Ms F Loliwe (ANC) expressed surprise that this sort of irregularity could happen under the noses of management. She asked whether an agreement had been reached with the Supply Chain Manager in order to buy his silence about information at his disposal. Why was the change in tender specifications not picked up? Who would benefit from improperly disqualifying a bidder in this way? She was concerned that the disciplinary process with regard to the Supply Chain Manager had been completed, while others were still under way, and asked why one process was being pursued with more urgency than others? She also asked who was ultimately responsible.

Ms S van Schalkwyk (ANC) said that the other four bidders had recognised that something was wrong with the tender process, and questioned then why experienced people on the inside were not able to pick up on this. Throughout the presentation, the CCMA had emphasised that there was no cost involved, but the entire process had in fact cost almost R3 million.

Ms van Schalkwyk pointed out that Ms Eleanor Hambridge, Acting Chair of the Bid Committee, did not respond on the perceived bias already identified in 2012. If there were already questions about the process then, she wanted to know why and how it had been signed off by the Director or Accounting Officer. There were incorrect calculations and several question marks had been raised around the process, but management had not picked up on it. She also noted that the tender was advertised without an approved budget, and asked if this was normal procedure, as she was concerned on this.

The Chairperson asked who appointed the bid committees and who sat on them.

Ms Kahn responded that disciplinary processes had begun with one individual because his role had been highlighted in the forensic audit. He was a technical advisor who should have been advising senior staff and the committees, which was why his role was so important. He could still have taken the matter to the CCMA or the Labour Court and caused further legal fees, which was why his resignation was accepted, as a way of limiting risk for the CCMA.

Ms Boikhutso said that although this was not the first time that the CCMA had put out a tender, incorrect calculations had arisen as a result of the new Preferential Procurement Policy Framework Act (PPPFA), which changed how point calculations for tenders should be done. The 2012 annual audit picked up that the calculation had not been done correctly. This was not limited to this particular lease, but other contracts also had not followed the correct calculation. National Treasury stated that if there was irregular expenditure there must be an investigation and action taken. This was why legal advice had been sought. Subsequent tenders and contracts were calculated correctly. The miscalculation was that the functionality score had been added to the price score where it should have been discarded.

The Chairperson said that this was a very simple calculation.

Ms Kahn said that the disciplinary action was still under way but that the majority of the cases were resolved, so only one or two were still in progress.

Ms Kahn said that as the Accounting Officer and the one who awarded the bid, she accepted that she was ultimately responsible. She made decisions based on the recommendations of her legal and financial staff, and the bid committees, which were further warranted by the internal auditors.

Mr D America (DA) said that it would be easy to accept that senior people were employed to provide expert advice, people whose judgement the Director would not question. Two of those people were present – the CFO and the Head of Legal Services. The problem was only discovered in March 2014, but by then the lease had already been signed, and the forensic investigation was only launched at that stage. The Supply Chain Manager may be guilty of irregularities, but he wanted to know how many other people were indirectly guilty of dereliction of duty?

Ms Boikhutso clarified that it was not the CFO or the Head of Legal Services that recommended that a tender be awarded, but it was the Bid Committees, which was in line with the Public Finance Management Act (PFMA). The BAC was the authority body that made the recommendation to the Accounting Officer to award the tender.

The Chairperson said that it was clear that the committees reported to the Director.

The Director clarified that there was no communication between the committees and the Director in order to ensure independence.

The Chairperson said that the Accounting Officer should not sign anything that was put in front of him without checking it. 

Ms Kahn said that it was important to indicate that no money had been paid to the incorrectly awarded bidder, but this was not to say that no expenses were incurred. They obviously had been incurred in relation to the litigation.

A lot of information had come out in the report findings which was not available to the Director at the time of the award being given. The Director would have no way of knowing that Ms Hambridge had conducted herself incorrectly,  as this only came out in the audit, when the recordings of the meeting were listened to by the auditors. No one else in the committee had reported the conduct. The individual had been sent on training to rectify this.

The Chairperson requested clarity on what the problem was with the Supply Chain Manager moving from one committee to another. Was management aware that he was doing this?

Ms Kahn responded that the audit had found that the same person should not be making representations to all of the committees, because they could carry through misrepresentations if any had been made. The Supply Chain Manager should have come to the Director and reported this problem, but that did not happen. The Supply Chain Manager was responsible for ensuring that the committees were correctly set up. 

Ms Boikhutso added that from the PFMA point of view nothing there specified that the Supply Chain Manager should not be in the committees mentioned. In previous years the Auditor-General knew that the Supply Chain Manager or Assistant Supply Chain Manager had been in the different committees. Having different people was only an enhanced internal control, but there was not in fact any law that said that this must happen.

Ms Loliwe asked why then this had been raised as an anomaly. She asked also at what stage did the Accounting Officer intervene? If the Accounting Officer indicated that she could not be aware of what was going on because she was not sitting in the meetings, what steps had she taken to oversee the process?

Ms Kahn responded that she had to rely on how the system was set up, on the internal audit department and on the people appointed to be a part of that process, to give assurance that the process has been conducted as it should have been.

Ms Boikhutso said that the reason the Supply Chain Manager’s presence had been raised as an anomaly was that as a result of this one person being involved in the three committees, he could have influenced the process.

Ms Loliwe asked if the Director and the CFO were in agreement on that point, since the Director suggested that it was a problem that this individual was in all three committees, but the CFO was saying that there was no direct link of this person to the anomaly.

The Chairperson asked if, when the Supply Chain Manager was advising the Director, she had picked up that he was moving from one committee to another and whether she had been comfortable with this?

Mr Ollis asked the CCMA to clarify that the Supply Chain Manager’s job was to oversee the process and check that it was done correctly, but that it was later found that he was trying to influence the process. It seemed that the main problem was that he was trying to ensure a certain outcome.

Ms van Schalkwyk said that whilst this person was moving from one committee to another trying to achieve a specific outcome, there were also competent people in these committees who had been through this process before, but at the end, they were still influenced. This cast some doubts on their credibility. She asked how the Committee could be sure that this had not happened in the past and would not recur in the future.

Ms Kahn explained how the CCMA operated structurally. The Supply Chain Department reported to the Director, through the Office of the CFO. The Director did not know about the day-to-day interactions, she did not know that the SCM was attending all the committees and would not have known unless someone had raised it directly to her.

The forensic audit report indicated that the process had the potential for undue influence, but ultimately, management had to rely on individuals’ integrity. The audit found that the CCMA had set up its committees correctly and that they were operating correctly. However, it was possible for the process to be influenced.

The Chairperson said that the Director had indicated that there was nothing wrong with the SCM’s actions because he was conducting oversight, and questioned then the response when the audit pointed fingers at him? Was any complaint received before the audit report about the presence of this individual in the committees?She wondered if he was "a sacrificial lamb" or whether he did indeed abuse his position? She repeated her concern that the responsibility ultimately lay with the Accounting Officer and nothing should have been signed without looking at the minute details, particularly when it came to tenders and money. It seemed that the Director agreed with the report, but that the CFO did not see these issues as a problem.

Ms Boikhutso said that the Supply Chain Manager had reported to her as CFO, and she had received no complaint that he could be influencing the process. There was competent composition of the committees. In each committee, in addition to the members and chairpersons, there was a risk officer and an internal audit officer sitting as observers of the process.

The Chairperson asked why the Supply Chain Manager had been disciplined when he was never told by the CCMA that what he was doing as a standard modus operandi was wrong.

The Director responded that when she met with the auditors they had told her that she had been let down by the Supply Chain Department, the bid committees, the finance department and the legal department. There had been disciplinary action to address this. The Supply Chain Manager had erred in numerous ways. Sitting on the committees was not the only issue of concern. There were other findings in terms of technical advice and processes being followed.

Ms Boikhutso agreed that the reason he was suspended and the charges were brought against him was not only limited to these committees. He had changed specifications without authorisation and did not follow policy with regard to calculation and functionality points. Charges against him were around negligence.

The Chairperson asked at what stage the CFO knew that the specifications had been changed.

Ms Boikhutso responded that the bid process worked differently to operational matters, and she had not been made aware of this immediately because approval was supposed to have been sought from the BSC.

The Chairperson asked if the committees had been working on the wrong specifications since the beginning, and no one had detected it in the committees or elsewhere in the organisation until the audit. How was this possible?

Ms Kahn said that the specifications were changed unilaterally by the Supply Chain Manager and re-advertised. There should have been oversight of this and this did not happen. Disciplinary action was being taken on this point. 

The Chairperson said that there was something very wrong if this mistake would not be noticed until the audit.

Ms Boikhutso explained that the Audit Report had found that a reasonable person could not have been expected to pick up the change, because the title under project description had changed.

Mr Morajane said that there was no way for management to know that there was something wrong – there was no complaint and no grievance lodged, everything looked normal.

It was the bid committee’s responsibility to keep abreast of the law, which would enable them to pick up problems with the calculations. He added that it would be untenable if the Accounting Officer and CFO were to be required to redo the process before signing off on it, and therefore declarations were signed by each committee to warrant that the correct process was followed.

He repeated that Ms Hambridge was the Acting Chairperson of the Bid Committee and had allowed members to talk about Potlako as if they favoured this company, but this only came up when forensic audit listened to the recordings.

The Chairperson said that the executive and the Accounting Officer should ultimately take responsibility. She understood what they were saying but it did not let them off the hook. This raised the question of how many other tenders were manipulated without their knowledge. If there had not been a problem with the building then these irregularities would not have arisen.

Mr M Bagraim (DA) said that the CCMA had initially claimed that nothing had been spent on this issue but that was clearly not true. He felt that it had cost an excessive amount so far, and was bound to still cost more as the process went on. He wanted to know who had done the audit and how much was charged per hour? Similarly, who conducted the disciplinary inquiry and how much did they charge? These amounts were ludicrous. He also asked why no claims had been made for damages against anyone to cover these costs? What was the estimated cost for the entire process?

He asked who was running the Milestone Property Group, and how it had happened that the tender was awarded to the wrong bidder in the first place. This was not the first time that the CCMA had conducted a tender process, so these mistakes should not be happening.

Mr Bagraim asked for how long staff were suspended and if they were paid a salary while they were suspended? Why was disciplinary action taking so long, as staff would be earning a salary for the duration.

Mr Bagraim requested a copy of the list of recommendations on internal controls and of the audit report. He felt that this information was being held back from the Committee.

Mr America said that there seemed to be no urgency on the part of the CCMA to recover costs from anyone. They had allowed the Supply Chain Manager to resign and walk away with no attempt to recover the cost from him. The motivation of why this was not pursued was not adequate. Costs could have been recovered from his pension fund.

How long would it take to restart the bidding process? What were the contingency plans being considered? The current landlord knew the desperation of the situation which made the CCMA vulnerable to increases in the rent.

Mr I Ollis (DA) was pleased that a detailed report had been provided, but said he had some serious questions. He wanted to know who were the shareholders of the Milestone Property Group. Who was Grand Parade Investment and where did they fit in? Who was Eleanor Hambridge? He asked if there was reason to suspect that the Supply Chain Manager had connections with Milestone, questioning why he should take this risk unless there was something in it for him. Was it possible that the other officials involved were part of an orchestrated attempt to deceive the CCMA into signing this unacceptable lease?

He questioned why nobody was being sued for this money or asked to cover the legal costs? Staff had attempted to sign a corrupt deal and they were caught out, so they should be pursued.

Mr Ollis commented that Milestone was in breach of contract, and thus questioned why it was not being held accountable for damages. There was no way that they would ever be able to fulfil the lease. There was a need to teach people that attempts to defraud the taxpayer should result in serious legal consequences.

Ms Kahn responded that Milestone was owned by two people, one of whom was Mr Oscar Puku.

Integrated Forensic Solutions conducted the audit, this was a tender process awarded on an open bid. The costs that were expended were high, but senior people were involved in the matter so they could not conduct their own disciplinary inquiries. The CCMA tried to deal with disciplinary process as quickly as possible but were delayed by legal challenges, and had to respect people’s right to a fair trial.

The Chairperson asked for clarity on why the disciplinary process had been outsourced.

Ms Kahn confirmed that part of it was, and these people were paid a part time fee for the work that they did. The disciplinary process lasted for six months, and was nearing finality.

The BAC and BEC members had been called on to answer why they did not pick up on these issues. Everyone had received training, counselling, a warning or written warnings. A spreadsheet of who was involved and the outcomes of their disciplinary processes would be provided.

She clarified the questions about costs. The CCMA had been reporting about contingent liability, or damages that might be brought against the CCMA. The building was bought for R30 million, and R5 million was spent to take it to the point of beneficial occupation. It was unlikely that the CCMA would have to meet any damages claim since the sale.

All options were being evaluated with regard to the legal proceedings. The case was still unfolding. It had only recently been discovered that the building had now been sold. The legal team would be looking at damages, if possible, but there were other legal costs to consider before going ahead with this and making recommendations to the board. The management was meeting with lawyers regularly.

The building had been sold to Grand Parade Investments. Nedbank had received the money that it was owed by the initial company, which mitigated the risk of damages in that regard. However, now that new information had come to light on the sale of the building, the CCMA would be seeking legal advice on how to proceed.

It would take three months to do a further tender process. Huge challenges were faced in terms of a contingency plan. The best option would be to extend the Darling Street lease and to put out a new tender. The challenge was that the CCMA could not do this until the court case was finalised. Hopefully, this would happen in the next month.

While there had been initial suspicions of fraud or corruption, at this point nothing pointed to anything untoward. The conduct implied that there could have been, but the CCMA was unable to amass enough proof.

Mr Morajane said that the CCMA was asking for costs from anyone opposing the action. Contractually, Milestone was supposed to tell the CCMA before selling the building. The CCMA would discuss if it would make any sense to seek damages for the failure to do so at the same time that it was asking for the bid to be set aside. There was a likelihood that action may be taken against the CCMA, as it was liable for R100 million (the total cost of the lease) if the lease was found to be still in effect. This was being deliberated, and when a decision was taken it would be reported to the Committee.

Ms Loliwe asked when the Supply Chain Manager left.

Mr Morajane said that he left in March 2015. The CCMA could still sue him despite the fact he had left, but only if there was an actionable claim. He could also still act against the CCMA. 

Ms Kahn said that a copy of the Forensic Audit Report would be provided to the Chairperson.

The Chairperson closed by saying that the CCMA had clearly not been on its toes in this matter, for it had failed to recognise the problems with the tender, and only discovered them when the building was not ready for occupancy on the initial date.

The meeting was adjourned.