Government 30 Day Payment Compliance to service providers: public hearings

Meeting report

The Chairperson said the meeting was about 30-day payment to service providers. The Public Finance Management Act (PFMA) was clear about when service providers must be paid. It was important to read the public administrators’ pledge when they are employed by the state. It states:

We, the public servants of the Republic of South Africa, proudly pledge to the nation and to all who inhabit and visit our Republic that:

1. We will promote and maintain the highest standards of professionalism and ethics in all we do in our official capacity, with ubuntu and bato pele as our ever present watchwords.

2. We will strive without end for the most efficient, economical and effective use of resources, including human resources, in our places of work.

3. We will at all times remain development-oriented in our work in the public administration.

4. We will act impartially, fairly, equitably and without bias in our provision of services to the people in South Africa, forever showing responsiveness to their needs as communicated to us through the public participation processes in place.

5. We will act accountably, by always explaining our actions reasonably and by justifying our decisions properly.

6. We will, within the limits of the law, provide the public with timely, accessible and accurate information in the interests of transparency in all we do.

7. We will cultivate good human resource management and career development practices so that human potential is maximised, on the basis that the public service remains broadly representative of the South African people.

8. We will respect, protect, promote and fulfil the rights guaranteed to all in the Bill of Rights.

9. We will at all times uphold the foundational values of the Republic as they apply to human dignity, equality and freedom; the advancement of non-racialism and non-sexism; the supremacy of the Constitution and the rule of law; responsiveness to peoples’ needs and openness in the public administration.

10. We will, in our loyal execution of the lawful policies of the government of the day, be forever vigilant to ensure that we act in a manner consistent with the Constitution, its values, tenets and principles.

Mr Peter Sulter, Land Surveyor, MEH Sulter and Son Inc, was from Grahamstown and had been in business since 1991.His company was classified as a small company. The last time he was in Parliament was in 2007, when he had presented on the Land Planning and Land Use Management Bill, which was signed only in 2012 -- and he hoped the same would not happen with the 30 days payment. He had done many surveys for government departments and municipalities, and could not recall when he had been paid within the prescribed 30-day period. Some municipalities took from than three months, to many years, to pay for services provided. In 2011, he had not been paid for work done for a municipality that had a ring-fenced budget for housing. He was eventually paid in instalments, but some of the money had not yet been paid to date. Sometimes his company had been paid after resorting to threats, but it was the duty of civil servants to pay service providers without having to resort to threats. The Free Market Foundation believed that the state was losing over R50 billion yearly in unregistered RDP houses. The Public Finance Management Act (PFMA) was there and the Municipal Finance Management Act (MFMA) was there, and the government did not need any other legislation to enforce payment.

Mr Richard Turner, Civil Engineer, Richard Turner and Associates, said he supported other submissions made by other companies in civil engineering. His company had faced many challenges to get payment. Sometimes a dispute over R10 took more than three months to be resolved. In one municipality, he had been taken from ministry to ministry to receive payment. His company was sitting with over 2 500 stands that should have been handed over two years ago. The 30-day payment was good, but small consultants needed to be paid in seven to ten days. Sometimes rejections of invoices came six weeks after the 30-day period. Government and municipalities must pay within seven to ten days, and only within 30 days when there were cases of rejections. The element of municipal infrastructure grant (MIG) funding should be amended to allow project managers to report to Treasury on misappropriated funds. In a certain municipality, R2 billion had been misappropriated when it was owed only R 2 million. There was a need to upgrade transparency and for companies to be able to take issues to the funding state authority.

Mr Motsamai Mofokeng, Town Planner, Emendo Inc, said his company provided services to national government, provincial government, local government, parastatals and the private sector. Services included project management for the design and construction of housing developments and infrastructure projects; design of townships; strategic planning (idp and spatial development framework); and special projects (policy, land audits, others). The current debtors to Emendo Inc amounted to R22 538 935.39. Since the written submission to the Portfolio Committee on 20 May 2015, an amount of R6 540 817.62 had been received. The Emendo Inc turn-over to sustain itself from an operational perspective amounted to around R8m per annum. From the above, it was evident that the outstanding debtors represented 1.3 times Emendo Inc’s annual turnover, and no company could survive such an impact. A substantial percentage (around 60%) of the debt needed to be paid to sub-consultants. The impact of the debt had been the retrenchment of six persons during 2014; a reduction of company assets; overdraft facilities had had to be re-negotiated with financial institutions; threats of legal action from sub-consultants; and an inability to provide work opportunities to young graduates, which had always been one of Emendo’s objectives. Emendo was currently involved with an arbitration process against the City of Johannesburg, which had cost Emendo in excess of R200 000 in legal fees.  No legal action had been taken by Emendo in relation to other structures, for the following reasons: smaller municipalities (Free State) had no funding available for payment; the allocated funding for the project had been used for operational expenditure or to cover debts towards larger institutions (water authorities, Eskom); a high turn-over of staff; more often than not, officials were replaced with new ones owing to resignations or restructuring. Newly appointed officials did not have the background to a project, and were reluctant to authorise payments. This scenario was prevalent in larger municipalities and provincial departments. Emendo Inc had established good relations with government bodies and did not want to compromise its good standing by taking legal action, or to jeopardise its relationship in the awarding of future tenders. In cases where service providers followed legal processes against a government body, such company was often “over-looked” in the awarding of new tenders.

Ms Sindisiwe Mbenje, Director, All Connections, had experienced various challenges in getting payment from government. She had started her business in catering, and it had taken 120 days to get a payment of R2 500 in 2008, before she got into the training in water reticulation and waste management business. At present, there were some municipalities she no longer did business with because when she claimed her money, she was victimised and excluded from future business. While governments wanted to build small businesses, it was also destroying them through late payment for services provided. When a company was not paid in over 120 days, it affected the business and family and everything connected to it. The 30-day payment to her was still very long -- small suppliers should be paid within 14 days. There were government departments that did that, and some municipalities paid 50% as a forward payment when one got a contract.

The Chairperson urged her to name the government departments that were not paying.

Ms Mbenje replied that she had signed a confidentiality agreement with her company. When one sent an e-mail requesting payment for services provided, some viewed you as rude -- yet they would be getting their salaries and bonuses while it was affecting her business.  Bloem Water pay upfront a certain percentage of money when offering a contract. Sometimes the company borrowed money to start a business, and by the time one received payment after six months or so, one would be left with nothing. One municipality had just terminated a contract her company had signed for three years. She had taken the issue to the provincial department and the ministry, but with no success. She wished she could have died at that moment. Some municipal managers would ask if you mixed business with pleasure. It was a sad story, a very sad one, and these were some challenges she faced in conducting businesses.

Mr Richard Rockman, Provincial Director, Public Service Commission (PSC), said section 38 (1)(f) of the Public Finance Management Act (PFMA), 1999, required Accounting Officers (AOs) to settle all contractual obligations and pay all money owing, including intergovernmental claims, within the prescribed or agreed period. Treasury Regulation 8.2.3 clarified the “prescribed period” by determining that “all payments due to creditors must be settled within 30 days from receipt of an invoice”.

Despite the above measures, departments were still not complying with the PFMA and the Treasury Regulation. This practice was “severely affecting the sustainability of businesses involved in outsourcing projects, especially small, medium and micro enterprises (SMMEs)” that relied on these contracts as their sole source of income. It was therefore viewed as counterproductive to the government’s efforts to ensure that these businesses benefited from inclusive economic growth. In his State of the Nation Address, the President had emphasised the importance of 30-day payment of invoices.

The PSC had decided to conduct public hearings at national and provincial level during 2012/13. The overall aim of the public hearings was to ensure proper consultation and public participation in the payment process with regard to outsourced services. The specific objectives of the public hearings were:

• To raise awareness amongst all relevant stakeholders on the government’s supply chain management processes with regard to the timeous payment of service providers of outsourced services.
• To raise awareness among relevant stakeholders on the challenges experienced by government departments in the payment process with regard to outsourced services.
• To determine the challenges experienced by service providers in the payment process.
• To facilitate the identification of bottlenecks in the payment of service providers and the fast-tracking of the process.
• To generate appropriate recommendations based on the engagements with all the relevant stakeholders.

The public hearings had been attended by government officials, especially from supply chain management (SCM) and/or Chief Financial Officers (CFOs), National/Provincial Treasuries, SARS and Small Enterprise Development Agency (SEDA) officials, as well as government service providers. The public hearings were preceded by a national meeting between the PSC and business organisation representatives. The purpose of this meeting was to understand the challenges experienced by businesses in the 30-day payment process. It also provided an opportunity for business organisations to suggest possible solutions to these challenges.

Seven public hearings were conducted at national and provincial level. Reasons for late payment advanced by departments were:

• that service providers did not adhere to the requirements of proper invoicing;
• service providers often did not have official purchase orders when they submitted invoices;
• quality assurance of goods and/or services that took place after capturing invoices delayed payment;
• accrual of unpaid invoices from one financial year to the next caused cash flow shortfalls;
• departments did not monitor their payment processes effectively;
• capacity related constraints hampered departments’ 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.

Reasons for late payment advanced by service providers were:

• there was no measure in place to track progress with payments;
• Departments took very long to pay closer to the end of a financial year;
• even invoices less than R1 000 were not paid within 30 days;
• departments did not always issue written purchase orders;
• departments made last minute changes to specifications without issuing a new purchase order;
• payment was delayed where the power to approve payment was not delegated to other officials;
• fraud and corruption existed as an obstacle to ensuring that service providers were paid on time;
• often service providers had no other option than to sue departments.

Mr Thulani Masilela, Deputy Director General, Department of Performance Monitoring and Evaluation (DPME), said that the Department would come to the Committee to make a presentation. As was the case in the Public Service Commission presentation, Cabinet had decided on the establishment of a special unit in the DPME to investigate cases of late or non-payment within 30 days. The unit would work closely with National Treasury (NT) and the Department of Public Service and Administration (DPSA). It would report on a quarterly basis to Cabinet on departments’ compliance with the 30-day period and would make recommendations regarding possible disciplinary action, where needed. Reports would be informed by investigation of cases, the resolution of these cases and monitoring reports from NT, the Office of the Chief Procurement Officer, and the DPSA. To give immediate effect to the Cabinet resolution to establish the unit, the DPME had allocated existing staff to it.

Mr M Ntombela (ANC) said a huge problem existed at a time when there was poverty, unemployment and inequality. Young entrepreneurs were the solution to these challenges. The challenge in having this kind of hearing was that the people who had the information feared being victimised. The government must have a summit with business and create a special desk to deal with these challenges. Something needed to be done urgently to solve the problems of non-payment of service providers.

Mr A van der Westhuizen (DA) said that if the PFMA was clear payment must be done in 30 days, those who ignored this were guilty, but who must lay charges against them? What was lacking was accountability from the directors general in government and the mayors in municipalities, yet they received bonuses at the end of every year. The delays were jeopardizing the economy and leading to a loss of jobs. One of the duties of an accounting officer was to sign a project when a budget was approved, and if a municipality could not pay because of a lack of funds, that was a transgression. The Committee must concentrate on who was responsible for holding those people accountable. 

Ms R Lesoma (ANC) said service delivery protests were a spill-over from non-payment to service providers. Treasury and the DPME must look at delegated authority. Small businesses must not enter into verbal agreements. She asked if anyone in the DPME who had understood what the President had said. The Public Administration Management (PAM) Act must talk to delegated authority. What did Treasury do to municipalities that redirected budgets? The Finance Committee must be briefed on non-payment to service providers. A report must be prepared on this subject and presented to the House.

Mr Jayce Nair, Chief Director: Governance Monitoring and Compliance, National Treasury, said that transgression of Section 38 to 42 of the PFMA was deemed to be financial misconduct. Section 38 (2) of the PFMA stated that the accounting officer may not commit to any contracts before a budget had been appropriated. A framework for delegation had been developed with the DPSA, and had just been approved by Cabinet.

The Chairperson felt that the issue of 30-day payment had to be debated in Parliament. There was also a need to debate on what government was going to do about invoices that dated back three to four years, given that over that period, leadership had changed. The public administrators’ pledge ended with the following words: “In offering this pledge, we affirm our belief that South Africa belongs to all who live in it, united in our diversity. We further affirm that we are working ceaselessly to build our multi-party, democratic and open society in accordance with the rule of law, so as to reflect the resolve of the nation to live in peace and harmony, to be free from fear and want and to seek a better life, thus earning its rightful place for South Africa in the family of nations”.

She welcomed the establishment of the special unit in the DPME, and hoped local government would be welcomed on board, since this was where there were many challenges.

The meeting was adjourned.