Supply Chain Management Review by Chief Procurement Office; SA's Expenditure Report 2014/15

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Meeting Summary

The Office of the Chief Procurement Officer (OCPO) in the National Treasury told the Committee that the current Supply Chain Management (SCM) environment throughout government was fragmented, with high staff turnover at senior management level, limited or no accountability, limited transparency, there was lack of coherence between departments, over emphasis on secondary objectives and the use of technology to automate and standardize and simply, SCM was under-utilised. The audit outcomes in national, provincial and national government consistently find SCM operations to be irregular. The root of the poor SCM performance in government was lack of clear, standard directives that represent all customer and commodity segments aligned to an optimal operating model and there was insufficient human resource capacity and management to complete activities in the expected timeframe and per acceptable standards. There was lack of competency, the motivation and culture of the workforce does not live up to the SCM code of conduct and public confidence in the role of oversight with relevant accountability arrangements and enforcement measures of findings, was declining rapidly. Areas that needed urgent intervention were construction, human settlements, public entities, travel and accommodation, telecommunications, computer services, consultancy, education and health.

Members were concerned that suppliers were charging excessive prices yet at the same time delivering poor quality products. They argued that SCM was too much concerned with over compliance. Fulfilling compliance requirements sacrificed productivity. They were also concerned with staff suspensions on full pay that go on for more than two years without completing disciplinary hearings. Reporting without consequences must end. There was the need to set an example by identifying people, bringing them to book so that they become a public example of consequence management and this will signal enough is enough. It does not make sense to procure something abroad because it was cheaper but this caused a six month delay in the completion of projects

Treasury reported on government's total expenditure for 2014/15. Highlights included the following facts:
▪ R1,132 trillion total expenditure
▪ R963,8 billion budget revenue
▪ R167.8 billion budget deficit
▪ R114.8 billion spent on State Debt costs
▪ A total increase in voted expenditure of R43.3 billion or 7.4% when compared with 2013/14
▪ Operational expenditure increased by R9.5 billion, or 7.4%
▪ Of this, expenditure on Compensation of Employees increased by R7.7 billion or 7%
▪ Expenditure on Goods and Services decreased by R351 million or 0.6%
▪ Funds transferred increased by R34.1 billion, or 8.6%
▪ Total expenditure is within the total budgeted amount for the 2014/15.
▪ R428.8 billion was transferred to departments
▪ R362.5 billion was transferred as a direct charge to the National Revenue Fund to Provinces under the equitable share agreement.
▪ R160.3 billion was transferred as voted expenditure to Provinces and Municipalities, representing an increase of 7 per cent.
▪ Expenditure lags the available budget by R4 billion in COGTA mainly due to the withholding of equitable share grants from some municipalities which did not perform according to Division of Revneue Act (DORA) requirements.
▪ R131.8 billion was transferred to households.

Treasury reported on South Africa's expenditure for 2014/15 noting: Total expenditure R1,132 trillion, Budget revenue R963,8 billion, implying a budget deficit of R167.8 million. R114.8 billion was spent on state debts, Vote expenditure increased by R43,3 billion, Operational expenditure increased by R9.5 billion, R131.8 billion was transferred to households and R428.8 billion was transferred to departments.

Members asked why state debt was increasing; why there was under spending in Water Affairs, why the Police spent more than the Department of Cooperative Governance yet that department dealt with service delivery to the people, why money was transferred to public corporations despite that they earned revenue, why PRASA was assisted with buying its new fleet, and why certain departments were spending more than 60% on administration, for example, the Department of Women and the Economic Development Department.

Meeting report

Supply Chain Management Review: How Public Procurement can Create Value
Mr Schalk Human, Chief Director: Supply Chain Management, in the Office of the Chief Procurement Officer in National Treasury, said the objectives of the Supply Chain Management Review was to provide a frank and candid assessment of these aspects of SCM:
- Role of SCM in the public sector
- Organizational structure and systems
- Role of technical and political office bearers in SCM
- Capacity of SC practitioners
- Legislation, regulations, policies and procedures in SCM
- Supplier management relations
- Balance between social objectives and transformation and price and quality of goods and services
- Provide insights into SCM reform agenda
- Provide a view of the role and functions of the Office of the Chief Procurement Officer (OCPO).

The current SCM environment was fragmented, high staff turnover of staff as senior management level, limited or no accountability, limited transparency, lack of coherence between departments, over emphasis on secondary objectives and the use of technology to automate, standardize and simply SCM was underutilized. The audit outcomes in national, provincial and national government consistently find SCM operations to be irregular. The root of the poor SCM performance in government was lack of clear, standard directives that represent all customer and commodity segments aligned to an optimal operating model and there was insufficient human resource capacity and management to complete activities in the expected time frames and per acceptable standards. There was lack of competency, the motivation and culture of the work force does not live the SCM code of conduct and public confidence in the role of oversight with relevant accountability arrangements and enforcement measures of finding was declining rapidly. Areas that needed urgent intervention were construction, human settlements, public entities, travel and accommodation, telecommunications, computer services, consultancy, education and health.

Discussion
Mr A Shaik Emam (NFP said the presentation was informative but will be useless if there was lack of sincerity and integrity in implementing the much needed reforms. People in SCM especially in local government believe that government was a cash cow and people charge three times higher when dealing with government. Even if committees were put in and legislation was put in, it seems not to work. In eThekwini, employees continue doing business with the state year after year. People use a lot of money in putting in a tender, but before it was advertised, some people inside know who will get the tender. He heard that a hotel in Durban was used by private sector officials who sit and engage on what they will receive when one gets a tender. He went to Free State and was told it cannot receive medicines because it was not paying on time. While the country has a very good minister of health, he has nothing to do with the appointment of MECs of health and if they do not perform, he can only report about it. There were no consequences on audit findings year in and year out. There could be no success if there were no consequences. Some cheaper contractors were subcontracted by middlemen in delivering services to the public sector. Some contracts were negotiated from R50 million to R350 million. Small business was a thing of the past.

Mr Shaik Emam said that the intention was good, but the practice was bad as there were people fronting all the time. Why despite identifying people who deal treacherously with the state become blacklisted so that they will never deal with the state? Some of these people will just remove themselves as director of companies, put a cousin in that position and continue to benefit from the state. He knows every bit of corruption, maladministration, noncompliance but the man of the street does not understand what is happening. In Eastern Cape, some contracts were simultaneously awarded for the building of the same school with no consequences. Giving to the lowest bidder was not a solution as officials budget let’s say R10 000 for a commodity and the tender will be given to someone at R9900 despite that the product may be of much lower price. The centralized SCM can work if people who occupy this office must be checked regularly and close any opportunities for them to maneuver the system. It will be good if people who adjudicate tenders not know beforehand which contracts they will sit on as they must be selected randomly and given tasks randomly. The people can come from different organizations. This reporting without consequences must end. An example needed to be set by identifying people, bringing them to book so that they become a public example of consequence management and this will signal enough is enough. He does not believe that the CEO or senior officials of an entity must be involved in procurement. Even the travel for members to the airport needs to be regulated. It costs R250 to go to the airport in a cab, but if four members get into the same cab, they pay R1000.

Mr N Gcwabaza (ANC) said the presentation was very depressing to hear. He asked if quality control was available in the public sector by making people go down and inspect ongoing projects. He asked how delayed completion of projects was dealt with when there was no substantial reasons for this or was as a result of certain goods being procured from abroad. However, in certain instances, it does not make sense to procure something abroad because it was cheaper yet it caused a six month delay in project completion. Some people were suspended for two years with pay with the investigation still ongoing. He asked if it was difficult to just hand over the matter to the Special Investigating Unit. Tied to this was the emergence of fraudulent qualifications of people in very high positions. Government should be able to track whether the qualifications of a person were genuine and not discover this only years after they had been earning a very good salary. This problem was also emerging in parastatals.

Mr M Figg (DA) was not excited by the report as the problem had been existing for some time. The switch to computer technology was not in itself risk proof as people were people. He asked if a cost benefit analysis has been done of the amount of money government loses in procurement. When procurement was decentralized, it created jobs and how many jobs will be lost in centralizing procurement? He asked why the registration of companies did not have a cutoff date for e-tendering based on their arguments that somebody was not always tax compliant or was not always BEE compliant, or a company does not remain a small enterprise. ​ He had problems with the term accountability as people had been unaccountable before. He asked which languages will be used on the e-tendering portal and how people who were technologically disadvantaged would be included. He asked if tenders will be available for public scrutiny.

Dr C Madlopha (ANC) was concerned that suppliers were charging government excessive prices yet at the same time delivering poor quality products. She asked if people do not check if goods received were of the specific quality expected. Most government department do not have performance contracts including SCM expectations. How was Treasury going to do it differently to be accountable as people were people and how was it possible to avoid political and administrative influence in the SCM environment. Credible procurement plans were not developed by government departments and always appeared as a finding in the Auditor-General report. She asked if the staff in the Office of OCPO have skills relevant to the mandate.

Mr A Mclaughlin (DA) said that there was too much over compliance, that in fulfilling compliance requirements productivity was sacrificed. He asked if there was no alternate way of procurement. After somebody tipped him off, he visited a site where RDP houses were being built that were a square metre short. He asked how government holds people accountable at the high court. A master of the high court was suspected of shoddy dealings and suspended for more than two years with pay. R60 billion could be saved by doing things better.

Ms M Manana (ANC) said the government was doing a good job by identifying its own problems and solving its own problems. The OCPO will ensure that whatever was identified to solve challenges was implemented.

Mr Human replied that for South Africa to be a great nation, SCM was an area that needed serious attention. As elected leaders, they must help technocrats implement these kinds of reforms and bring accountability. A good corporate citizen pays his taxes and if he cannot, he cannot do business with you. If one was defrauding the taxpayers, he was defrauding poor people. Suppliers that were arrogant thinking that they were the only suppliers especially in agriculture, needed to be told that if they ignored accountability, they were compromising transparency and there was no need to apologise for transparency requirements. There were rules for emergency procurement but smart procurement means that this cannot happen three or four times a month. The inefficient way of procurement on a repeat product should be changed. A repeat of emergency procurement was common in government. Technology also comes with risks. The central supplier database (and Mr Human said that he would return and demonstrate how these platforms work) tells you the cost of an item in every district from R27 in Limpopo to R11 rand somewhere else. Technology provides integrity and information to public managers. Treasury put financial misconduct regulations in place for municipalities last year. There was also a good number of consequence management examples with 42 000 cases being subject to disciplinary processes with 1500 dismissals as recorded by the DPSA. However, this did not come only from the 250 000 people who did business with the state in the last financial year. Sometimes people accuse them of manhandling them, being too rough but that is what needs to be done. There were many good examples of cities where tendering was done in public for example Gauteng and the City of Cape Town and this was open for public media. Some government department disclose who won and why a supplier was disqualified including their prices. The OCPO wants to make it visual through technology by making it available 24/7 365 days a year. The e-tender portal publishes those who won the tender and the prices of those who were disqualified.

The OCPO will collaborate with the police, SIU, anti-corruption group, DPSA, Public Service Commission, Trade and Industry and collaborate as a family to address challenges in SCM including provincial treasuries. There was a tender default register of people who misrepresented themselves and a restricted database of companies that did shoddy work. These were linked to the central supplier database. Tax compliance certificate was changed to tax status as they were many taxes that a supplier need to comply with, previously it was on VAT tax. If a company becomes non-compliant, it will be removed from the database and suppliers were also notified on the status of their tax certificates. For suppliers in deep rural areas, they could register at Thusong Centres, post offices and Small Enterprise Development Agency (SEDA) offices around the country onto the central supplier database. In SCM, the average vacancy rate was 30% but it was taking six months to fill the positions which was really “nonsensical”. An assessment test was being used to test those who apply for SCM positions in spite of their having experience and great qualifications, including interviews, before recommending appointment. The DPSA normal assessment for senior managers was too generic for SCM functions. An assessor was used to assess junior staff and middle managers in SCM competency testing. It can identify gaps in a person's skills and make a person enhance his knowledge in the areas he lacks competence.

This review shows that the country was in trouble and the solution was growing a competenct supply chain workforce in all spheres of government. It was in contact with the National School of Government to develop a comprehensive curriculum for supply chain management people. All new public service workers were now being inducted in SCM functions as it was everybody’s problem. Everybody who delivers a service must know how procurement was done. It was sitting on the outcome 12 cluster dealing with disciplinary action, and progress had been made on suspensions and disciplinary hearings in the past six months. The thinking in South Africa must shift from just being compliant to productivity and quality work. Technology cannot replace the role of oversight. No job losses were expected as a result of the central supplier database. Supply chain was for delivering services. This was needed and enables people to get into the mainstream economy through the 80 / 20 rule and 8 / 10 rule. It was not for making small or black businesses become industrialists. Giving a person a tender without resources and experience was like giving someone land without fertilizer and mechanical equipment for tillage — if that was so, it becomes tenderpreneurship. The cheapest supplier was not always appointed, as in construction, there was a grading system depending on the value of the project. Under-quoting was a problem as some people provided quotes for R4 to supply bread to prisons only to stop after realizing it was not viable. Being in a SCM position was very difficult and to prevent political intervention, one must increase transparency to make it difficult for anyone to interfere by opening tenders publicly and using e-procurement in the next couple of months. Regulations only provided for 15% review cost of contracts and 20% in construction before Treasury can be approached for anything further than that. It currently receives many of these requests for review. It then reviews extensions with the departments and the Auditor-General report on this. The OCPO has managed to get political will from Cabinet and the Minister of Finance in SCM in the past six months. He was encouraged with the support from committee members, together with the sun meaning better legislation, the moon representing skills and the stars representing technology, they will make an impact in the SCM environment.

National Treasury 2014/15 Expenditure Report
Ms Julia De Bruyn, Chief Director: Public Finance, National Treasury, presented on full report on government's total expenditure for 2014/15. Highlights included the following facts:
Treasury reported on government's total expenditure for 2014/15. Highlights included the following facts:
▪ R1,132 trillion total expenditure
▪ R963,8 billion budget revenue
▪ R167.8 billion budget deficit
▪ R114.8 billion spent on State Debt costs
▪ A total increase in voted expenditure of R43.3 billion or 7.4% when compared with 2013/14
▪ Operational expenditure increased by R9.5 billion, or 7.4%
▪ Of this, expenditure on Compensation of Employees increased by R7.7 billion or 7%
▪ Expenditure on Goods and Services decreased by R351 million or 0.6%
▪ Funds transferred increased by R34.1 billion, or 8.6%
▪ Total expenditure is within the total budgeted amount for the 2014/15.
▪ R428.8 billion was transferred to departments
▪ R362.5 billion was transferred as a direct charge to the National Revenue Fund to Provinces under the equitable share agreement.
▪ R160.3 billion was transferred as voted expenditure to Provinces and Municipalities, representing an increase of 7 per cent.
▪ Expenditure lags the available budget by R4 billion in COGTA mainly due to the withholding of equitable share grants from some municipalities which did not perform according to DORA requirements.
▪ R131.8 billion was transferred to households.▪ Expenditure lags the available budget by R4 billion in COGTA mainly due to the withholding of equitable share grants from some municipalities which did not perform according to DORA requirements.
▪ R131.8 billion was transferred to households.

Discussion
Mr Shaik Emam asked from where the money for the budget deficit came. He was concerned that state debt was increasing instead of decreasing. In which areas was the regional bulk infrastructure (RBI) grant in Department of Water and Sanitation being used? He asked which municipalities did not comply with DORA requirements leading to the Treasury withholding funding. Why was it that the RDI grant was not spent all whilst people where facing water challenges in the country.

Mr McLaughlin said while he was not an economist, it was contradictory to note budget deficit was 167 billion and also saying budget spend was within the limit. Why was state debt increasing? He asked the meaning of the word households, which departments had direct charges increasing, why there was under spending in Department of Water and Sanitation (DWS), why the Police spent more than the Department of Cooperative Governance yet it is the department that dealt with service delivery to people, why money was transferred to public corporations despite they make money, why PRASA was assisted with buying its new fleet, and why were certain departments spending more than 60% on administration such as the Departments of Women and Economic Development. He asked about the underspending on social grants and people being disqualified by age by the Department of Social Development (DSD), why Eskom and DWS spent less despite problems existing in the water and energy sector. There must be a reason for the delay in appointment of contractors by DWS. Why was some money returned by Eskom to Treasury when Parliament has just approved a R23 billion loan to Eskom?

Mr Figg asked the amount of the budgeted deficit, why the same problem was existing in Transport year after year with ENATIS. He asked if expenditure lags were rolled over. Any money withheld to municipalities was unfair as it affects communities as a result of the underperformance of a few people. Why was there an increase in Basic Education school infrastructure spent yet it was budgeted for and why money was transferred to PRASA when it was an income generating agency?

Dr Madlopha asked for the acceptable percentage for a budget deficit. She asked the reasons for reduction of budget in goods and services. She asked the reasons for municipalities not complying with DORA requirements. She asked if delays in projects because of bad weather in DWS had an effect on the original budget.

Mr Qcwabaza asked what it means that R119 billion was 62% spent on compensation of employees, it was 62% of what.

Mr Dondo Mogajane, Deputy Director General, Public Finance, National Treasury, replied that a budget deficit it of 3.9% of the budget was budgeted for. The state debt was around 35% of GDP, well in range. Countries like Japan has 200% of GDP state debt.

Ms de Bruyn replied the increase in capital spent on schools was in comparison to the previous year where R1.2 billion was spent while the last financial year it was R2,5 billion. The biggest part of it focuses on water and sanitation in schools. Transfer to corporations and public entities were because of a range of subsidies the government offers such as Telkom and Eskom among others. Household transfers does not only mean social grant transfers but also housing allowance, leave gratuity among others. It will be good to have a meeting with members to go through some of the terminology used in financial reporting as the terms mean different things from the natural setting as in financial reporting.

Ms Marissa Moore, Chief Director: Urban Development and Infrastructure, National Treasury, said the RBI grant was increased by 22% due to sanitation needs. The RBI grant was exclusively for RBI and the DWS could only shift the money through an adjustment from parliament and it faced a challenge that the sanitation function came from Human Settlements. This resulted in delays in spending the money. Contractors and materials were not appointed and delivered on time. The DWS took to Cabinet a water resource strategy and it was approved. At  an institutional level Treasury must be able to strengthen the capacity of the DWS and its entities. The function shift from Human Settlements resulted in delay of expenditure as DWS was unhappy with the way in which some of the contracts were signed. The sanitation program was problematic in spending since its inception. She was not sure if bad weather increased the cost of the project and she will ask DWS to do an analyses if there was an increase because of bad weather. PRASA new rolling stock procurement was budgeted for about three years ago before the final contract was signed. By the time the contract was signed, exchange rate shifts were considered because of depreciation of the rand. It was the second time that Transport has overspent because of ENATIS. The short answer was that the original approach for collection towards financing ENATIS was money from vehicle licencing and this money was collected by provinces and sometimes local government. Money was transferred to SANRAL because it wanted to maintain roads of about 25 000km of the road network of which only 15% of this was tolled. The underspending by COGTA arises from departments returning unspent grant money. Other municipalities did not spend unconditional grants correctly leading to withholding of money. The grants usually underspent were the Urban Development, Infrastructure Grant and Public Transport Grant. It was true that citizens were affected when grants were withheld, but they were also withheld where the services were unavailable because money for those grants was underspent. The department will have to come and argue how they will be able to spend the money. The COGTA disaster relief was underspent because there were no disasters to use the money for and it has to be returned to National Treasury. On Eskom, the contract was terminated for the installation of solar water heaters and it was now being undertaken by the municipality with the help of the Department of Energy. Treasury was helping in setting up the institutional structure to be able to run the project and a memorandum of understanding.

Mr Mark Blade, Chief Director: Heath and Social Services, National Treasury, replied underspending on social grants was around 0.6%. Members recall that the new registration drive affected 900 000 people and 600 000 of those have come back for one or other reason. In 2014/15, there was underspending on old age grants and foster care grants. To gain a foster care grant, it was a very bad process as it has to be certified by the high court and DSD had not been budgeting appropriately on this one and if one becomes over 18, one no longer qualifies for a foster care grant.

Ms Nompumelelo Radebe, Director: Budget Analyst, National Treasury, replied that operational budget refers to money for funding goods and services, and capital assets. R119 billion was 62% of R192 billion. There was high spending on operational budget in Police to pay for the salaries of the 193 000 police officers, and on the capital side this included upgrading of police stations and building forensic labs and purchase of police vehicles. It was called a lag in spending and not over spending because sometimes it was difficult to estimate the true cost a department was going to incur. An example was civil claims to the state and transfer to households. If you spend less than that, it becomes a lag in spending. Decrease in goods and services was a result of the goods that a department did not buy or more efficient spending on goods and services in line with Instruction 1 of 2015 by National Treasury for departments to look for ways of minimising costs on goods and services.

Mr George Thembo, Director: Public Finance, National Treasury, replied that the Department of Women spent 62% on administration because it was newly formed from the previous Women, Children and People with Disabilities Department. The last two functions were transferred to DSD. The administration budget will decrease as new programmes will be introduced that need additional funding.

Mr Bothwell Deka, Director: Economic Policy, National Treasury, replied that the Department of Performance Monitoring and Evaluation (DPME) has a 69% administration budget which was worrisome. It was working on restructuring with advice from DPSA to reduce its administration budget.

Mr Mogajane replied that lags will not necessarily result in rollovers, but if asked in terms of the PFMA, a roll over will be granted. It was having continuous bilateral engagements with Energy and Water Affairs from an expenditure point of view. Only five departments that were outliers were listed for lagging in spending because the reasons were known to Treasury. The Committee can ask departments as they appear before it to account on why there was late appointment of contractors or the absence of a procurement plan. This was something the Treasury does not have control over, but the management of a department does.

The Chairperson said the Committee will engage other departments after seeing expenditure trends in the first quarter performance report. While it was good to withhold grants to municipalities, the consequences were detrimental to communities and this problem affects mainly smaller municipalities that rely on transfers even to fund the salaries of their employees.

Mr Mogajane replied this must be deliberated on when they discuss DORA. The Treasury was only flexible if the  law put in place allows this otherwise it sticks to the law. If DORA suggests to withhold, it has no option. The National Treasury expects provincial treasuries to act, but the relationship between provincial treasuries and municipalities was an issue. It was not only withholding but assisting municipalities in financial management so that they do not misappropriate funds meant for other functions.

The Chairperson thanked the officials from Treasury and hoped to see them when they report on first quarter expenditure report.

Meeting adjourned.

 

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