Public Service Commission consolidated report on compliance with government’s 30 days payment period to service providers

Standing Committee on Appropriations

04 August 2015
Chairperson: Mr P Mashatile (ANC)
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Meeting Summary

The Committee was briefed on the public hearings which were held regarding compliance with government’s 30 days payment period to service providers.

In May 2012, it was reported by the National Treasury that 3 470 invoices had not been paid by national departments, amounting to approximately R73 million. In addition, was a total of 21 847 invoices to the value of approximately R1 billion not paid by the provinces.

Seven public hearings were conducted at a national and provincial level. The Free State, Limpopo, Eastern Cape and Gauteng provinces participated in the public hearings, along with Statistics South Africa (Stats SA), the Department of Public Works, Department of Home Affairs, Department of Rural Development and Land Reform, and the South African Police Service.

The hearings found several reasons that payments were not being made, including that service providers often did not adhere to the requirements of proper invoicing or did not have official purchase orders when they submitted invoices, and that the quality assurance of goods and/or services that took place after capturing invoices delayed payment. Allegations of fraud and corruption were also raised during the hearings.

Best practices were identified and shared by departments, and the PSC made several recommendations, emphasising the need for monitoring and accountability. A unit had been established in the Department of Planning, Monitoring and Evaluation (DPME) to investigate cases of late or non-payment within 30 days.

Overall, the PSC had observed a lack of empowerment of service providers through the provision of information and a lack of implementation of Batho Pele principles. The public hearings also had an impact in strengthening public participation, bringing an understanding of the impact of late payment and effects on small businesses, and the empowerment of service providers through the information provided first-hand by the relevant departments.

Members were very concerned about the problem of late payments. They emphasised that the work that the PSC had done in identifying the problem and making recommendations must be followed up with action taken against the culprits. Financial late payments and misconduct could not be accepted. Members felt that there was a “general culture of bribery” which should urgently be addressed.

Non-payment disadvantaged service providers and created problems for small and medium businesses. This had a negative economic impact and was not in line with government’s policy of job creation and economic growth. 

Meeting report

Public Service Commission consolidated report on compliance with government’s 30 days payment period to service providers
Commissioner Phumelele Nzimande, Public Service Commissioner, and Ms Irene Mathenjwa, Chief Director of Service Delivery and Compliance, from the Public Service Commission (PSC) briefed the Committee on the public hearings which had been held regarding compliance with government’s 30 days payment period to service providers

The PSC held public hearings because Departments were found not to be complying with the Public Finance Management Act (PFMA) and National Treasury (NT) regulations. The aim of the public hearings was to ensure proper consultation and public participation in the payment process with regard to outsourced services.

Seven public hearings were conducted at a national and provincial level. The Free State, Limpopo, Eastern Cape and Gauteng provinces participated in the public hearings, along with Statistics South Africa (Stats SA), the Department of Public Works, Department of Home Affairs, Department of Rural Development and Land Reform, and the South African Police Service.

In May 2012, it was reported by NT that 3 470 invoices had not been paid by national departments, amounting to approximately R73 million. Stats SA recorded 1 838 invoices to the amount of approximately R17 million not paid. The Department of Public Works recorded 884 invoices to the amount of approximately R42 million. Home Affairs recorded 343 invoices over 30 days to the amount of approximately R8 million. The Department of Rural Development and Land Reform and the Department of Police recorded 118 (to the value of approximately R2.5 million) and 129 invoices (to the value of approximately R1 million) outstanding invoices respectively.

The problem was also experienced in the provinces. In May 2012, it was reported that with regards to the provinces, there was a total of 21 847 invoices to the value of approximately R1 billion not paid after 30 days by the various provinces. The Free State had 3 260 invoices to the amount of approximately R99.5 million, Gauteng had 4 294 invoices to the amount of approximately R306.2 million, and Limpopo had 3 163 invoices to the amount of approximately R161.6 million not paid after 30 days. Data on the Eastern Cape was not available at the time.

The Departments advanced several reasons for late payment. Service providers often did not adhere to the requirements of proper invoicing or did not have official purchase orders when they submitted invoices. The quality assurance of goods and/or services that took place after capturing invoices delayed payment. The accrual of unpaid invoices from one financial year to the next caused cash flow shortfalls. Departments did not monitor their payment processes effectively, and capacity-related constraints hampered their ability to pay service providers on time. Fraud and corruption resulted in late and/or non-payment to service providers and some service providers receiving preferential treatment. There was no measure in place to track progress with payments.

These, and numerous other internal problems, meant that often service providers had no other option than to sue departments.

Best practices were identified and shared by departments during the public hearings, including: the development of standards in terms of the different steps of the payment process; ring-fencing monies for the payment of service providers; training all supply chain management (SCM) and financial management staff on the proper procedures and best practices in the payment of service providers; instituting disciplinary measures against officials failing to comply with the 30 days payment period.

It was recommended that departments ensure that purchase orders, specifications and invoices corresponded. Departments needed to effectively monitor compliance with 30 day payment period. Departments should implement an electronic payment system. National Treasury should include a best practice standard in the service level agreements between government departments and private service providers where sub-contracting applied.

The PSC engagement with the departments and provinces on the findings and recommendations of the report, which were widely circulated. Numerous payments had been made since the PSC intervention, and these were detailed in the submission to the Committee.

Several developments had since taken place in the public service. The Unit had been established in the Department of Planning, Monitoring and Evaluation (DPME) to investigate cases of late or non-payment within 30 days. The unit was to work closely with National Treasury (NT) and the Department of Public Service and Administration (DPSA). A workshop with all Chief Financial Officers (CFOs) of national departments would be convened to identify challenges experienced by departments in the payment of service providers on time and develop strategies to resolve issues of late or non-payment of service providers.

Overall, the PSC had observed a lack of empowerment of service providers through the provision of information and a lack of implementation of Batho Pele principles. The public hearings also had an impact in strengthening public participation, bringing an understanding of the impact of late payment and effects on small businesses, and the empowerment of service providers through the information provided first-hand by the relevant departments.

Discussion

Mr A Emam (NFP) said the Committee was concerned that these problems would be identified but not resolved. Financial late payments and misconduct could not be accepted. He insisted that the PSC identify who the culprits were and inform the Committee of why they were still in their positions. With such a high rate of unemployment in the country, people who were guilty of misconduct could not be protected in their jobs.

He was frustrated that the PSC had to ‘order’ departments to make payments. Departments should not accept goods without confirmation that they had been ordered. He was concerned that government had created a general culture of bribery. Service providers should also be aware that they were dealing with massive organisations and that fraud and corruption should be guarded against.

Ms E Louw (EFF) asked if any action was taken against problematic departments after they had transgressed. Were all departments failing to comply with the thirty day payment period or only the five that were mentioned in the submission? When would data be available for the Eastern Cape? She requested more information about fraud and corruption as an obstacle to ensuring that service providers were paid on time.

Mr M Figg (DA) felt that the problem was getting out of hand. There were two fundamental problems: that departments did not have a system of order and payments, and that NT regulations were being violated. Service providers were disadvantaged as a result of incompetent government officials, which was not in line with government’s policy of job creation and economic growth. The problem had been known about since a communiqué was issued in 2011 and yet it was not improving. The Committee had to act on this information, and guilty parties should appear in court.

Mr A McLoughlin (DA) said it was alarming that departments and provinces were not using the systems which the PFMA had put in place. The economic impact for the country was very concerning. Government was setting a bad example by failing to comply with its own contracts.

It was unacceptable that the State should be incurring legal fees when there was no justifiable reason for failing to pay. The submission stated that Mr Thabane Zulu had not been paid due to the Department not following due processes, and the matter was now in court. Why had this not been immediately resolved, since the Department was clearly in the wrong?

Mr McLoughlin expressed his awareness that the PSC could only make recommendations and observations, but was not in a position to take steps to resolve the problems. He was concerned that the problems would not be followed up and asked who was responsible for laying charges or ensuring that departments were complying with the laws. Why was action not being taken against those who had caused the problem?

Ms R Nyalungu (ANC) asked if there was any progress on a particular campaign. After the 2012 public hearings, was there any change in the number of dropped invoices?

Commissioner Nzimande responded that action was being taken and interventions had happened since the hearings, which were detailed in the submission. For example, a dedicated unit in the Department of Performance Monitoring had been established to ensure that this matter was on the radar of the Presidency and to get the departments to account. Information about which departments were defaulting and which were improving could be sent to the Committee by the Treasury.  

She clarified that the five departments detailed in the submission were the top offenders, which was why they were selected.

She confirmed that the PSC’s mandate was to investigate, make recommendations and monitor implementation. The PSC welcomed the establishment of a unit as a focal point where information would be consolidated. She shared Members’ concern that despite all of the interventions, the problem persisted. The PSC was doing its best to ensure that accounting officers were held to account.

She agreed that service providers were also to blame as they did not always provide full information with the invoice, but departments had to take the initiative to address this, instead of waiting until the 30 days had elapsed to explain to the service provider why the payment had not been made.

Dispute resolution mechanisms ought to be used to resolve problems instead of litigation. Government officials should also put themselves in the shoes of service providers who were relying on payment for the survival of their business.

The hearings with small and medium businesses were closed meetings, so that service providers could feel free to raise their concerns without jeapordising their relationship with departments.

There were corrupt practices happening which were possible because oversight and management was not being conducted as it should be. Supply chain managers, corporate services and accounting officers should be monitoring payments so that they could pick up patterns that may indicate corruption.

Ms Mathenjwa said that the fundamental problem was that the values and principles of the administrators needed to be corrected. The human dignity of service providers needed to be considered, otherwise invoices would not be seen as important.  If values such as transparency, accountability, and the other values of the Constitution were upheld, then everything else would fall into place.

The new unit would ensure that there would be consequences for poor performance, that defaulters would be revealed and that this would go on the record of accounting officers. Rapid progress had been seen when the PSC intervened on behalf of a service provider, but when the service providers went to submit invoices without the support of the PSC then problems persisted.

A representative from the Treasury responded that it was the duty of the accounting officer to ensure that charges of financial misconduct were laid in the event of payments not being made within thirty days.

There was not an integrated system for purchasing and payment yet, but there were departments within the public sector that had implemented systems. Some departments had systems based on a normal excel spreadsheet that had been developed by a very junior official. The important point was that there must be political and administrative will to ensure that payments were effected within thirty days. A Gauteng Member of the Executive Council (MEC) had made it non-negotiable that payments would be made within fifteen days and that was effective. This demonstrated that although the current financial management system did not provide for integration between purchasing and payments, departments could develop their own systems.

The best systems could be in place, but if there was no accountability or consequence for violations then the problem would persist. The problem existed because of the lack of consequence management. The Treasury’s last report indicated that payments within thirty days must form part of the formal agreements of both the accounting officers and the chief financial officers (CFOs). The CFO must hold the financial officers to account and find out from them what their department’s accruals were and the reasons for outstanding payments. The financial officers should not use the excuse that there was incorrect information on the invoice or whatever the case may be. Those thirty days should only start from the receipt of a valid and correct invoice. If the invoices were not correct then they should be returned to the service provider.

Follow-ups from committee members

Mr Emam agreed that the problem was caused by a lack of consequences, inefficiency and maybe an inability to perform. He asked if there was an alternative to taking the matters to court. The Committee needed details on who the offenders were so that they could follow up

He believed that corruption extended all the way up the supply chain. Sometimes unnecessary or non-existent projects were budgeted for and went to tender.
Mr McLaughlin said that the Committee should ensure that the systems made it possible to make payments within the time frame. It could be that complicated bureaucracy made that impossible.

The representative from the Treasury assured the Committee that the systems did provide for payments to be made within thirty days.

Commissioner Nzimande added that the system was very efficient, they ran payments on Tuesdays and Thursdays so it was possible to make payments more than once a month.

The Chairperson said that Parliament should be consistently monitoring this issue and questioning departments about it when they presented. This was a serious issue which was causing problems for critical businesses.

Commissioner Nzimande agreed emphatically with the Chairperson.

She said that the PSC had made a firm recommendation regarding sub-contractors. In the event that a sub-contractor was involved, an addendum should be put in the contract noting this. The PSC had found that sub-contractors often did not receive their payments and were not mentioned in the contract, although they had been effectively giving services to government.

It was a problem that some officials interpreted the instruction to make payments within 30 days as meaning that they should wait 30 days before paying.

The Chairperson suggested that e-tendering and e-invoicing might help. Ministers needed to make an example of departments that were not complying. The Committee should look at all available ways of putting pressure on departments that were not complying.    

Mr Emam stated that corruption was a two-sided issue, it was also from the side of the supplier. The supplier must also pay the price of corruption and be black listed. There must be a mechanism that could be used when a supplier was found to have received work without the due process having been followed, without the necessary order numbers and such, then the supplier’s contract would be terminated.

Adoption of minutes

Minutes from 28 and 19 July 2015 were adopted.  

The meeting was adjourned.

 

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