Chief Procurement Officer's progress and new projects report

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Finance Standing Committee

11 May 2016
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Chief Procurement Officer presented a progress and new projects report on Office of the Chief Procurement Officer (OPCO). He explained that the OCPO has taken several measures to create electronic portals for procurement and supply chain management (SCM). Among these are the Central Suppliers Database, the eTender portal, the gCommerce platform and the eProcurement platform. In general, these initiatives will improve transparency and efficiency, ultimately making it easier and cheaper for businesses to work with government, while reducing the administrative burden.

The OCPO also plans to use transversal contracts to establish the central supply of appropriate goods and lower the costs of supply. A primary goal of the OCPO is to use procurement to achieve empowerment goals. Through its various measures, the OCPO expects to be able to save R75 billion over the next three years, and Mr Brown indicated that he will be personally responsible if this goal is not met. A particular problem in the system that Mr Brown discussed is that poorly performing suppliers do not face sufficient consequences for non-compliance and corruption. The OCPO currently does not have proper authority to investigate and penalize these cases, but the OCPO is looking into ways to increase its powers through legislation in the Public Procurement Bill which is under discussion.

Members applauded the amount of initiative and the level of progress made by the OCPO, and were also pleased by the uptake of the Central Supplier Database (CSD) by business and government departments. They were particularly pleased with new transparency measures aimed to reduce corruption, and some members raised concerns for the safety of the OCPO staff as a result of these measures.

Members asked what role the OCPO had played in the nuclear build programme, and whether the OCPO had produced any reports on this. Similar questions were asked about the acquisition of VIP aircraft, the Eskom coal contracts and the progress made with the review of these contracts; how the OCPO intends to deal with an entity like Chancellor House which is set up specifically to benefit the ruling party in terms of contracting.

Other members raised concerns about the pressure that might be placed on smaller businesses and local economies. It was generally expressed that empowerment had so far been unsuccessful, and that an online system may also marginalize those with poor access to or understanding of online systems. A final concern raised by members was the fact that departments were often failing to pay suppliers for their services within the required timeframe of 30 days.

In response, Mr Brown explained that OCPO has been interacting with the Department of Energy and had given input on what form the procurement should take. Similarly, he explained that the OCPO had been in communication with the Department of Defence on the procurement of aircraft. The OCPO reviewed a number of the Eskom coal contracts, and in one instance the OCPO provided the Eskom board with a report and Eskom needs to act on the issues raised in the report.

With regard to empowerment, Mr Brown explained that it is necessary to try and support the organic growth of black and disadvantaged businesses. He explained that due to the scope of the problem, it is not feasible for the government to perpetually support these businesses. Rather the system must aim to encourage the growth of these businesses in the formative stages so that they can become self-sufficient and competitive. The OCPO is taking an aggressive stance to address empowerment, an area in which progress has so far been disappointing.

Mr Brown agreed that the new measures will reduce corruption, and explained that security measures were being considered for OCPO staff. While legislative changes will help the OCPO to address poorly performing, non-compliant and irregular activities, it is also up to governmental departments to set an example and follow through with enforcing the legislation in an honest manner. He agreed that the lack of payment within 30 days was problematic and harmful to business, although this is often an issue within the non-paying department itself. The OCPO is setting up a call-centre to help companies communicate with the Office to try to fast-track payments that are overdue.

Meeting report

Mr Kenneth Brown, head of the Office of the Chief Procurement Officer (OPCO), presented the OCPO progress and new projects report. He explained that the OCPO was established in March 2013. A detailed review of public Supply Chain Management (SCM) was undergone by the OCPO in 2015. The staff complement is currently 125 people strong with 80 filled positions. Staff belong to various streams within the OCPO, being: Policy and Legal, Governance Monitoring & Compliance, Transversal Contracts, Strategic Sourcing, SCM ICT, and SCM Stakeholders and Clients Management.

SCM ICT is the process of automating and digitizing supply chain management as far as possible to improve efficiency and transparency. The purpose of the SCM Stakeholders division is to improve government’s communication with suppliers, as the OCPO found that government was in general not communicating sufficiently with suppliers.

The OCPO is fully established with the necessary technical expertise, as SCM is a relatively specialized field. Importantly, the business model of the OCPO involves a relationship with as many as a thousand procuring entities across the state. At the same time there are roughly 120 provincial procurement departments. There are therefore over one thousand entities in total. The goal of the OCPO is to try and make these institutions optimal. The Public Finance Management Act (PFMA) also gives responsibility for this to the National Treasury and provincial treasuries.

SCM is a more specialized field then people acknowledge. The leasing environment, and the travel industry are examples where external expertise has been necessary to properly understand the situation. Therefore, the OCPO often gets external experts to come in and support the OCPO on short-term contracts.

The stakeholders affected by the OCPO include many groups: within Treasury there is the Budget Office that needs to understand procurement planning to prepare the budget. Outside of Treasury there is government itself; many of the reforms it has implemented will operate with help from other governmental branches. Then there is the private sector – there are over 200 000 suppliers that do business with the state. Next, the communities that benefit from government service delivery are stakeholders. Civil society organizations also have a role to play. There are also business groupings such as Business Unity South Africa (BUSA). All of these parties interact with the OCPO – the Office as a whole gets almost 1000 emails a day. This is why we have a dedicated branch in the Office to deal with stakeholder management.

The biggest project for the OCPO at the moment is the Central Supplier Database (CSD). It was launched in September 2015 and is now live in all nine provinces. There has been training and to help run the CSD and the eTender portal. There was three-month long radio campaigning to raise support and awareness for the CSD as well as billboards and newspaper adverts. Stakeholder awareness and engagement is important – the OCPO is engaged in civil society to make sure that the reforms are understood.

The CSD requires four forms when a business responds to a tender: company information, a tax clearance certificate, a BEE certificate, and there is one more. The Auditor-General has found in the past that the area most susceptible to problems and corruption is administrative compliance. If a tender is about to be adjudicated, and an official has a favorite company that would not win the tender otherwise, they can just remove their tax clearance certificate from the submission for example.

The CSD will automate this process so that there is no room for foul play. It is a once-off registration which takes around 10 minutes to complete. The tax clearance certificate is retrieved automatically from the South Africa Revenue Service (SARS) and the company’s director details are retrieved automatically from the company director checklist of the Companies and Intellectual Property Commission (CIPC). Bank account information is also retrieved automatically, and the Department of Home Affairs provides identity documents. Records are used to blacklist tender-defaulters.

Ms T Tobias (ANC) remarked that the term should not be ‘blacklist’ but rather something else, such as ‘whitelist’, for example.

Mr R Lees (DA) said that he would second such a motion.

Mr Brown continued the report, explaining that there are 200 000 suppliers on the CSD, with 100 000 of these already registered and fully compliant. Use of the CSD is compulsory from 1 April 2016 for companies and from 1 July 2016 onwards for local government.

Ms Nokuthula Simelane, Director of Integrated Financial Management, OCPO, took over from Mr Brown to discuss the new online systems. She explained that the electronic CSD system means that physical papers need no longer be submitted.

She then discussed the eTender portal. This is a web-based platform that allows organs of the state to advertise bids, publish bid notices, amendments or erratum, as well as to publish cancellations and awards. The portal will help emerging suppliers get opportunities without having to pay for documents. They can log on and view opportunities and download tenders. So there is less cost in accessing the documents.

The fact that everything is published and available online is good for transparency. When a tender is awarded there is information available on all the bids and details explaining why the winner was chosen. Advertisements are linked to the Demand plan, and tender awards, cancellations and amendments will all be visible online.

The eTender system is also a big cost-saver because a lot of money is paid to advertise tenders. Entities such as Transnet that have taken up ePortal have saved a lot of money. There have already been 2 758 tender advertisements published thus far on the Central Supplier Database (CSD).

Mr Brown added to this point explaining that the OCPO had spent R2.5 billion on advertising with R1 billion being spent on the advertisement of tenders alone. This figure excludes local government advertisements and this is just considering provincial and national government. He believes that the eTender portal will save the OCPO around R1 billion per year. Shifting away from traditional advertising will impact on the newspaper houses and discussions have been held with them.

The Department of Public Service and Administration (DPSA) also spends around R1.5 billion on the advertisement of jobs but there are plans to make a portal for this as well. The eTender system is very cost effective for business; you virtually do not have to leave your office to apply.

In the past tender documents could range in cost from R500 to R100 000. Furthermore, these were often non-refundable and sometimes you realize after paying that your company does not fit the requirements and cannot respond. With the eTender system, you can now read the advertisement online without printing it and can respond appropriately. As mentioned it is also very good in terms of transparency.

Suppliers have generally indicated support for the eTender project. Connectivity is an issue for many companies. They are interacting with municipalities and provincial governments to make platforms available for people in areas with poor internet connectivity.

gCommerce is an online shopping tool that makes it easier for procurement officials to purchase from transversal contracts. It is a web-based system that is accessible anywhere and can be thought of as an Amazon.com for government. At present the OCPO has 29 central contracts, which cover close to 15 thousand items. Accessing the transversal contracts at present is a very laborious process, however. OCPO aims to make a platform where the official can log in and search for a product, such as x-ray machines for example. A list of suppliers and prices should then come up.

gCommerce will reduce administrative burden as it is no longer necessary to contact sellers to place orders manually. Products, prices and stock can be analyzed online before an order is placed. Turnaround times tend to be quicker from online systems. It also allows government to limit over-expenditure as it can be integrated with financial systems. Finally, commodities and items on the platform can be identified as they carry the United Nations Standard Products and Services Code (UNSPSC) tags.

The eProcurement platform is an integrated system that enables end-to-end procurement process management. Its benefits include demand management (procurement plans, spend analysis, etc), sourcing, purchasing, and supplier management.

Mr Brown explained that the current quotation system is problematic. If you are in a municipality, goods or services costing R200 000 or below, you may acquire though quotation. If you are a national / provincial government entity, it is R500 000 and below that you may acquire through quotation. This system is the single largest source of corruption. Procurement in this category amounts to close to R90 billion a year. People order things that are not needed, there is cover quoting, and orders are often not delivered. The OCPO is negotiating the introduction of a uniform platform across government to manage the quotation system electronically. This system will interface with the eTender portal and the CSD. OCPO hopes to eliminate some of the leakage that has occurred through the current system.

Mr Brown said that creating a price referencing system has been difficult in terms of management because prices vary by region and change on a daily basis. The automated quotation system will not ask for more than one quotation from each company– rather the user will have access to all people who can supply a certain area and the prices each of them offers is visible. This will make it difficult for officials to justify buying from the most expensive suppliers.

The next topic of the presentation was governance, monitoring and compliance. Mr Brown explained that the OCPO reviews thousands of contracts, some of which are above R10 million in value. In the Passenger Rail Agency of South Africa alone there are around 280 contracts that are to the value of R10 million and above. For the sake of transparency, the OCPO will publish these contracts (R10 million and above) on a quarterly basis. This will be linked to the eTender portal. In the eTender the adjudication of bids with prices and even a scoring of each bid will be available as well as the winner of the bid, so that the decision can be evaluated in terms of its fairness. A challenge is how to build analytical capacity in the OCPO to start to notice patterns that are suspicious.

Transversal contracts are centrally negotiated contracts. The spend in total is currently R26 billion over 40 contracts, but it is planned to increase to R90 billion for more than double the number of contracts. There is research that must be done on a commodity before it is decided that it should be included in a centrally negotiated contract. For example, a transversal contract is not appropriate for goods that are easily produced locally. School furniture is a good example because it can be produced and procured locally as a raw input (wood), and as intermediate and finished goods. In these cases, the OCPO can still prescribe what the furniture should look like and set a reasonable price range for the goods.

If the OCPO does want a central contract for a product, this is not done before discussions are held with the most important stakeholders in the production and use of those goods that may be affected by the contract. So it is not a unilateral decision making process. An example is the stationery packs provided to school children. The OCPO estimates that the reduced price that these packs could be offered at through a transversal contract would save the country R1 billion if all provinces participate. At the same time, we will make sure not to kill local businesses that supply these goods. This is why it is important to understand and take into account local economic dynamics.

From 1 April 2016, the participation of government in the existing forty contracts and the new transversal contracts will become mandatory. This means all common goods purchased by government will be procured collectively with better buying power. Fifteen more contracts will be negotiated and managed centrally; these will focus on health, education property, ICT and support services sectors. Banking is another important sector. If you have four major banks and all entities go out on tenders for these four major banks, one will find that the cost that these banks are charging are roughly the same. But the costs of advertising and adjudicating the tenders are so high that it does not make sense to do it through tender. So the OCPO is looking at ways to use the central contracts to reduce administrative burden.

Currently, processing a tender takes forty days to get through the paper work. It is estimated that with the eProcurement system the process should not take more than a week. Bids are uploaded and evaluated electronically, which will save costs and time. The OCPO is looking into local government to see which parts can be moved onto transversal contracting. Electricity is an example that could work. The OCPO also aims to increase contracting with local, black and small business. The OCPO aims to use economies of scale cleverly to benefit the entire system.

The OCPO has done extensive work on infrastructure – R300 billion has been spent on procurement. 26% of this has been spent on cement, with a further 11% is on steel. The OCPO has done data analysis on this, in order to try and understand the inputs and aggregate them to unlock better economies of scale. OCPC wants to renegotiate inputs and aggregate them.

Ms Estelle Setan, Chief Director of Strategic Procurement, OPCO, discussed strategic procurement which she defined as the task of finding a better way to procure more effectively based on research. It involves putting more effort into planning to ensure that the entity in question is approaching the market properly. It is about advocating a differentiated approach: the OCPO does not buy stationery in the same way as infrastructure.

Airlines and hotels are two examples where the OCPO has managed to reduce costs. Lower air fares for government officials were negotiated for airlines and maximum rates per star-rating were introduced for hotels. Travel policy also dictates which levels of government officials get access to which quality hotels – it is not up to personal choice.

Part of the redesign of travel and accommodation has been to remove duplication of effort. Travel management companies were charging government according to a variety of cost models, including management fees, transaction fees, and service fees. Many entities were putting out tenders for travel management companies across the country. The OPCO has looked at the travel ‘arena’, and produced a standardized remuneration model for government across all travel management companies. The OCPO is currently putting together a panel of service providers which will be facilitated by Treasury. The regions will still be responsible for putting out closed bids from the panel. Thus local economic development will not go by the wayside. Tenders will also be designed to advocate local economic development so that smaller travel agents do not lose all their business.

Strategic procurement is closely related to transversal contracting – transversal contracting is one of the options available to help strategic procurement. If a commodity lends itself to central procurement it will be organized according to transversal contracting. Strategic procurement is about lowering costs and addressing inefficiencies in the supply chain and the internal value chain. Savings through efficiency are indirect savings. The OCPO is expecting to save R1.6 billion from airlines and this is just through direct savings. Changing traveler behavior will save more and we have some measures to try and calculate this indirect savings.

Mr Brown took over again to explain current reforms in strategic procurement. Strategic procurement requires understanding the commodity in question to decide what procurement modality is efficient. Sometimes there is middle-man that takes a cut. Consider the example of oncology machines - there are only three three companies in the world that manufacture these machines. In this case it is costly for all parties to go out on tender for the machines. It is also about managing the change that is brought about by government policy, so as to avoid destabilizing economies.

Mr Brown explained that the OCPO has undergone extensive data mining to try and learn what products the government had been buying. The OPCO know knows, for example, who the top 100 suppliers are. This information helps the OPCO to understand exactly how to put out tenders in order to level the playing field. It is important that the OCPO understand how the agents in the system are operating. Mr Brown stated that it can be necessary to become a ‘thug’ in order to know how to deal with thugs.

In supply chain management there are 10 competencies which can be categorized into four groups: demand management planning, supplier management through bids processing, contracting and asset management. Currently, people are too concerned with putting out the tender before proper planning has been done to see if the goods in question are appropriate. This is why the goods that are delivered are often wrong, or houses are built of bad quality. The bigger effort needs to be earlier at the demand management and planning stages. The OPCO has started suggesting that departments must approach the Procurement Office with a demand plan for the goods they want, related to their budgets.

In the past demand plans were submitted to the OCPO but they were not sufficiently analyzed. The OCPO recently did rudimentary analysis of these plans. It was often clear that plans were far in shortfall of the spending of the entity. Planning is also important so that business can plan ahead to respond to government. The OCPO will be generating reports on how people adhere to and deviate from procurement plans. The online system including the monitoring by the OCPO will help departments to manage the tender process, which departments have already expressed satisfaction with.

There will also be condonations. The Auditor-General has said before that one of the biggest problems is with the tenders that do not get advertised because an accountant has the authority to deviate from processes if there is an emergency. The entity then finds a service provider to the do the job. When the audit is complete the auditor writes to the OCPO and requests that the OCPO condones the expenditure. In areas where there were problems we do not condone the expenditure, but inquire as to whether disciplinary action was taken. In many departments there are regulators with internal investigations ongoing, some done by the police. The OCPO wants transparency on all ongoing investigations within a given department.

The Minister of Finance had indicated that the OCPO should save R25 billion by year three. Mr Brown believes that the OCPO is capable of saving this amount in 2016 alone. There are currently various negotiations underway to bring about savings. There are negotiations with Telkom that Mr Brown believes will save the country R500 million. The OCPO is saying to suppliers that they must adapt to the new system. The OCPO is taking various steps to save money and is confident in the ability to save R75 billion by year three.

The OCPO strategy to savings are focused on five areas:
- Renegotiate existing contracts with the top 100 suppliers

- Consolidate spending on common goods where economies of scale provide opportunities for government to use its bulk purchasing power (transversal contracts)
- Utilize technology more intelligently to reduce the duplication of effort and cost
- Optimization and innovation – cost avoidance, cost reduction, cost effectiveness; reduction of red tape.

Leasing is an area with room for savings. In the private sector, the norm for worker space is about 18 square metres per worker, while in government it is about 36 square metres. Just through better space management, the leasing spending could thus be cut by 30%-40%. These bigger offices also have negative economies, for example the number of people within range of a printer in a more spread out office is less and you therefore end up needing more printers.

Mr Brown then discussed the work currently underway at the OCPO. The OCPO is busy rationalizing instruction notes and circulars to simplify them. The OCPO is looking aggressively at empowerment through procurement policy. The Public Procurement Bill is in the advanced stages. It will deal with a number of issues such as empowerment and transparent reporting, abuse of the system, dispute resolutions, and the role of civil society organizations (CSOs).

Mr Brown asserted that the OCPO works in collaboration with the state, and that 90%-95% of the government is in support of the new OCPO measures. There some ‘delinquent’ departments that are still not participating in some of these projects. Sometimes information is not passed properly through departments.

Mr Brown asserted that SCM skills are unique skills that not everyone has; in particular, you need to have a business-oriented mentality. You need to be aggressive on change management.

The single biggest problem the OCPO has faced has been the lack of consequences for non-compliance and corruption. Often the corruption is blatant and people can see it but they do not take action to report it. The responsibility to execute authority in these cases lies with the accounting authority. The OCPO does not have the power to take action against these cases. Transgressors need to be dealt with. The integrated justice system is not efficient in dealing with incidents of corruption.

Often suppliers that do poor work remain in the system and are not penalized. Housing is an example – it is not clear that the suppliers that are building the poor quality housing have been sued or had any action taken against them.

Payment within 30-days has been a serious problem. The OCPO is working to create a call centre for suppliers, to facilitate and fast-track outstanding payments. Government acknowledges that it needs to stimulate small businesses; it is not doing so if it does not pay them.

The Finance Standing Committee needs to tell the OCPO what information it needs to assist it in its oversight role. He closed the presentation by emphasising the point that the people in charge of budgets and procurement need to be skilled and well-informed, and to operate departments as though they were businesses.

Discussion
Ms Tobias commented that public representatives often do not understand how important they are. In her opinion, the CPO Office is as important as the executive. She asked if people in comparable positions in other countries are provided with security. She suggested that the work towards greater transparency could anger the people who are currently benefiting from the existing system, and that this could pose a threat to the top staff at the OCPO.

She then asserted that while modernization is necessary, she maintains that it is important to back this system up with a manual system in case the online system crashes. It is also important to consider the disadvantaged when we modernize, as some people that may need to apply for tenders may not know how to use the internet, or they may not have sufficient access. Learning to use technology is a long process and it is not fair to assume everyone is equal in this regard.

Ms Tobias used the example of conditional grants where the cash from the grant was taken away from a department if it did not have the capacity to spend the grant. She worried that this same problem will occur for the eTender platform, if there is insufficient training to help businesses understand the online system.

Responding to Mr Brown’s comments about deviations, she added that sometimes an official has no choice but to deviate if the instruction to do so is coming ‘from above’ in the department. Often the person acts under duress – but there is no record of this because the instruction is verbal. [Thus an investigation may not reveal the true cause of erroneous or fraudulent behavior.]

She agreed on price listing. She gave the example of a petroleum company and asked how one could know and keep pace with price changes. It is very difficult to keep track and predict the price of things. She asked if government has systems such as SAP [management software] that give you an integrated approach in terms of portals.

Ms Tobias commented that the term ‘rural’ is subjective term, and questioned the feasibility of rolling out connectivity to all the areas that will need to connect to the online systems. In some cases, areas that are labeled ‘rural’ do not even have an office where internet access could be provided.

On the question of space efficiency, she observed the private sector tends to put workers together in the same room to maximize efficiency. She suggested that the government does the same.

Ms Tobias added that more focus is needed on particular ways to address empowerment. Lastly, she pointed out that the OCPO has promised to save R75 billion in the next three years, and the Finance Standing Committee will be waiting to hear if this had been achieved.

Mr D Maynier (DA) stated that of the thousands of contracts dealt with by the OCPO, there were three in particular that were of interest to him:

Firstly, he wanted to know what role the OCPO had played in the nuclear build programme. He asked if the OCPO had produced any reports. His second query was on the purchasing of aircraft, and the role that the OCPO had played in the acquisition of VIP aircraft. Thirdly, he queried the Eskom coal contracts and the progress that had been made with the review of these contracts. He asked if the Office had been met with cooperation from Eskom in conducting that review. He stated that the impression in the 2016 budget document by the OCPO was that Eskom had resisted the review of its coal contracts. Has the CPO received any reports from Eskom? Has the CPO produced any reports on the review of the coal contracts at Eskom?

Mr Maynier then turned to the question of blacklisting. He asked how the OCPO intends to deal with an entity like Chancellor House that is set up specifically to benefit the ruling party in terms of contracting.

He raised what Mr Brown had referred to as ‘delinquent’ departments. He asked that the OCPO name the five or so ‘most delinquent’ departments.

Mr S Buthelezi (ANC) felt impressed by the buy-in of other departments. He emphasized that the work of the OCPO must be done across the government – the OCPO is not a policeman but rather part of a team. The safety of the OCPO staff would be better if the other bodies of government bought into the system and were also working to enforce the new regulations so that there many people involved and responsible for the implementation.

He pointed out that the benefit of economies of scale is generally that they produce a lower price. However, lower prices often lead to the marginalization of small business that does not have the buying power to unlock these economies. Bed and Breakfasts (B&Bs) for example could benefit from the travel policy, and they are very vulnerable to hotels that can provide accommodation at lower prices.

Mr Buthelezi mentioned the Preferential Procurement Policy Framework Act (PPPFA). Black business and government SOEs have discussed this legislation. Discussions are lengthy and there many promising ideas about localization and empowerment, but at the end of the day 90% of procurement goes to price. Government needs to better incorporate other goals like employment into its Acts. Ultimately, the large majority of people that want to be involved in the mainstream economy remain marginalized.

Mr Buthelezi commented on Mr Brown’s statement that there are often insufficient measures taken against non-compliance and irregular behavior. He explained that reporting such behavior to the police is necessary but not a sufficient measure to ensure that disciplinary actions are taken.

Mr Buthelezi commented that the OCPO has mentioned empowerment, but that he would like a more substantive explanation about how the OCPA will encourage empowerment. He stressed that there has been no change in the past 22 years except the further entrenchment of established business.

On the issue of 30-days payment, Mr Buthelezi commented that he has personally seen companies ‘go under’ while they are waiting to get paid by government. He explained that small companies ‘go from hand to mouth’ with their finances. Once they have delivered it is crucial that government pays them otherwise they become stuck. Big companies have the advantage in that they can afford lawyers to ensure responsiveness. This also opens up an area of corruption, as officials are offered bribes to speed up payment. In reality the payment often just requires ‘the push of a button’ and the official is deliberately stalling the process to encourage a bribe.

Mr Lees wanted to know if there would be regular enough updating of information, such as on tax compliance, so that the eTenders and the automation system could run effectively. The same would apply to the CIPC listing of directors for example.

On the point about the savings the OCPO plans to make, Mr Lees was happy that the department was positive, but wanted clarity as it was a little bit unclear when Mr Brown spoke. He asked plainly if the OCPO would meet the R25 billion savings that have been budgeted for.

Mr Lees then spoke on transfer purchasing, stressing that maintenance is as important as purchasing itself. He brought up the example of medical equipment. It has been the case in parts of the country that medical equipment purchased without a maintenance plan became inoperable, and as a result patients ended up being transferred elsewhere and in some cases dying.

Tenders are often written to suit certain brands and to benefit certain companies in corrupt practices. A company may pay an official to make the conditions set out in the advertisement favorable to them. The work that the OCPO has done to stop this has been tremendous.

Lastly, Mr Lees suggested that stationery is a case where small business should be considered as they may be squeezed out by government central procurement.

Ms D Mahlangu (ANC) was pleased to hear that the government of today is responding to corruption. The supply chain effectively determines the way an organization runs and this reflects on the ANC. She echoed concerns about local economies. She added that while the OCPO is focused on cost-reduction, it is important not to forget quality.

The fact that poor quality suppliers have not had action (blacklisting) taken against them is disturbing. A national system is good because it means suppliers cannot look to different provinces to find work when they are blacklisted in a certain province. A transgression in any province should be visible nationally.

Ms Mahlangu added that it is not right that we approach 30-days payment as though it is a great challenge – it is not impossible and in fact it is already the law. She asked how the OCPO is going to implement this policy to greater effect. She said that if there are to be nine different Offices for the nine provinces, a guideline policy is necessary in all nine.

Ms N Mokgosi (EFF) stated that the importance of the OCPO cannot be overemphasized. The majority of the people in the ruling party are against corruption. The economic environment is currently difficult - the OCPO is imperative in helping the economy grow.

Ms Mokgosi stated that her doctorate was in quality management systems in a developing country environment. She asked if the OCPO had any relationship with the South Africa Bureau of Standards (SABS). She felt that the SABS has not being utilized properly by government. Part of the reasons we have failing houses and so on is that the inputs are not meeting quality standards. The SABS is therefore very important in supporting the OCPO. The government needs a centralized place to deal with quality standards. Price is inexorably related to quality as it is really a question of value.

She saw Mr Maynier’s questions as being pertinent to the more important question – what are your key risk areas? In other words, how can we stop these big corruption cases from arising.

Ms Mokgosi asked if the OCPO had really applied itself to the question of the key cost drivers of government. She wanted to see that the OCPO’s road map for these proposed savings was aligned with an analysis of its key cost drivers.

Ms Mokgosi took issue with the OCPO using the phrase “two commercial languages” to refer to Afrikaans and English. She stated that it is controversial to define something as a “commercial language”. Black African languages can no longer be defined as outside of the business context. Covert racism is perpetuated in this rhetoric. Languages are a part of economics and we cannot continue to marginalize groups in this manner.

She also wanted to know if the OCPO had established a structure to allow smaller businesses to move into the supplier space. She asserted that a structure is sometimes needed to assist this process. It is not good to continue supporting established monopoly capital.

Mr B Topham (DA) stated that the DA supports the steps mentioned in the OCPO report. The OCPO presentation highlighted the point that procurement is a skilled task: a specialist division that has not yet been discussed is forensics such as tender investigation. One area that they do not have access to is BEE certificates and there is a lot of fraud in that department. Linking that information automatically would reduce opportunities for fraud. If the system is going to be designed to support BEE it must still be transparent in this respect.

On the eTender portal and the CSD, Mr Topham asked how often the tax status of companies would be updated. He felt that the central supplier database will allow smaller business more opportunity to interact with government.

Mr Topham added that it is not only the OCPO but also the role of other departments and local governments to introduce internet into rural areas. We should not ‘go backwards’ by reintroducing manual methods. He asked if a company on the CSD would be able to log in and update info such as the areas they served and products on offer.

He felt that opening the tender process is an excellent idea but will face resistance which will be challenging. He is sure that the 90-95% adoption of the tender system is already a positive sign. It is probably the people who were abusing the manual system that are not supporting the online tender system.

Mr Topham agreed with previous comments about the importance of quality standards. It is necessary to compare apples with apples. The online system should allow there to be multiple suppliers available offering multiple qualities so that value for money can be maximized.

He added to the question of central supply that transversal supply works best for simple things like photostat paper. He suggested that a system that chooses between suppliers based on a randomizing algorithm between equivalent offers may be a good idea. Another option is to create a system that automatically chooses the best option out of the suppliers based on certain conditions. He supported the idea of providing a quality rating for supplier.

On the issue of 30 days’ payment, Mr Topham clarified that the law states that payment must occur within 30 days from when the government signs the invoice, which is an unfair system. He added that all companies have an interest in ensuring healthy cash flow [not just small companies]. He also observed that improving payment times may drop prices further, if businesses have been anticipating the delays and adding interest to cover the costs of the delays to them.

The Chairperson stated that the work of the OCPO has been impressive, and that it is important that Mr Brown keeps his position in the OCPO. He raised the same concerns as Ms Tobias about the security of the OCPO staff.

Mr Carrim noted that local communities and municipalities had opposed some of the new OCPO regulations that threatened their business, particularly those in the Public Procurement Bill. He presumed that the OCPO must have gone through various legal and other processes to make sure these initiatives would succeed.

There has been a dismal failure in the past to use procurement to empowered the disadvantaged and deracialise the economy. He agreed with the point of comparing price versus quality. At the end of the day service delivery is more important than the colour of the skin of the small business owner who is bidding, because the people who suffer from poor delivery are far worse off than the small business owner who may benefit from OCPO policy. We can ensure empowerment and quality.

Private sector corruption is widespread when these companies deal with government and it needs to be dealt with. “Black” or “white” or “grey” listing is important and must be done – we must name and shame.

Mr Carrim asked when the OCPO expects to have the Public Procurement Bill ready for the Committee to consider. He also requested clarity on the relationship between Mr Brown within the OCPO, and the Minister of Finance. What oversight role does the Minister have over the Mr Brown and the OCPO? What role does Parliament have? He suggested that the OCPO find a forum to train government officials, especially Committee Chairs, in the changes to be brought in by the OCPO.

Finally, Mr Carrim asked what power the OCPO has to veto a contract if it is found to be irregular.

Response by the OCPO
Mr Brown began his response by explaining that the Office is currently organized as a branch within Treasury, which reports to the Director General and the Minister. The OCPO is busy with the Public Procurement Bill which aims to give certain administrative powers to the OCPO. The precise corporate form of the OCPO is still under consideration. Currently the OCPO does not have any powers to veto – it operates under sections 6 and 18 of the Public Finance Management Act (PFMA).

He responded to Mr Maynier’s question. He explained that OCPO has been interacting with the Department of Energy and had given input on what form the procurement should take. The OCPO has been in discussions with the department for the past year and the process is reasonably close to concluding how the procurement should unfold.

Similarly, he explained that the OCPO had been in communication with the Department of Defence with regard to the procurement of aircraft. There is an existing contract of leasing and a court order was issued to deal with this contract. But the OCPO ultimately wants to indicate to the department that are so few airlines that it would be preferable to cut out the middle-man and deal directly with these companies. In discussions, various procurement modalities are being considered.

The OCPO reviewed a number of the Eskom coal contracts, and in one instance the OCPO provided the Eskom board with a report and they need to act on the issues raised in the report.

Mr Brown decided to use the phrase “restriction regime” instead of “blacklist.” He explained that the OCPO has conditions of contract which say that if a company does not perform, there is a process to be followed to restrict the offending company. In other words, the OCPO has a process to restrict bad suppliers. Ultimately it is the procuring government entity in question that must decide whether a company must be restricted or not. The company needs to be given an opportunity to respond. If it turns out there were not grounds for the restrictions, the procurement entity can be taken to court. This applies not only to Chancellor House but to everyone that does business with the state.

Mr Brown explained that he may have used the phrase ‘delinquent department’ too loosely. There are currently many reforms being implemented by the OCPO, and some departments managed faster in response to these than others.

On the Central Supplier Database, Mr Brown explained that a company need only register once, whereupon they receive a company ID number. The database then automatically receives the companies’ directorship from the CIPC. When your company applies for a tender, that is when the information on tax compliance and the directorship is retrieved. So the information is updated at the relevant moment when the business is applying for tender. The system also sends businesses alerts if they have become non-compliant in certain areas such as tax clearance.

To simplify the system, when a company registers, it can only specify two or three key business areas that it supplies. A company cannot be a general supplier. Another feature is that if you are a director, and have directorship in 10 companies, the system can map the family of companies that you are a director in.

Ms Simelane responded to Mr Topham’s question about the ability of companies to log in and update their information. She explained that this information is specified when the company registers. Government employees can filter their searches by the products and areas that have been captured.

Mr Brown added that you can search by area to the level of wards. On the eTender portal, because government will no longer be advertising in newspapers, the OCPO is putting a function into the system that will SMS suppliers to inform them about tenders that they are interested in. The OCPO has also considered developing an APP (application) through which suppliers can see relevant tenders.

Mr Brown responded to Ms Tobias’ question about connectivity, and he admitted that it is a problem. He reiterated that the development of internet access is the responsibility of each municipality and the procurement offices at that level.

Responding to Mr Buthelezi’s question about empowerment, Mr Brown explained that state-owned entities (SOEs) were not part of the PPPFA regime until 2012. These entities complained when they were brought onto the PPPFA, saying that it is impeding empowerment. But when you ask these companies who they have managed to empower before the PPPFA, they do not answer. They cannot provide reasons as to why the PPPFA will impede empowerment.

In order to create real empowerment, government needs to encourage the organic growth of businesses. Government should kick-start these businesses, and support them until they can operate on their own. Government should exit at some point. He explained that while as much as 90% of the population may be effectively excluded from the economy, only 9% of the budget goes to procurement. It is not possible to support the entire populate through government spending. Rather we need to aim to stimulate organic business growth. Both private and public enterprise are critical.

We need to be honest and acknowledge that the current inefficiencies in systems are perpetuating inequality. The Public Procurement Bill will clarify how procurement will target black business, women-owned business, and the disabled. But no matter how good the legislation is, it is also up to the procuring entities to implement the policies. Some departments use a panel system, which is a smaller database of suppliers for that particular entity. Often these panels will have several companies on them, but only two or three are ever given business. So, yes, we can change the legislation, but there are certain practices within the system that also need to change in order for empowerment to work properly.

The current ‘restrictions regime’ leaves the decision up to the accounting officer in a given department. This system does not work if the accounting officer is part of the problem. Discussions on the Bill have been centered on finding a way to give the OCPO power to intervene in areas where there is failure so that the OCPO can take charge of the restriction process. The company and/or its directors can be restricted. When a director is found to be corrupt, the OCPO wants to put it in the Bill that they are permanently marked as corrupt so that they can no longer do business in the country at all [even registering a company in the private sector].

Mr Brown gave the example of an equipment company from San Francisco, where the ‘middle-man’ helped them operate in South Africa in a corrupt manner. An OCPO delegate went to the United States and spoke to this company. Because anti-corruption regulation is so aggressive in the US, the company was forced to come to South Africa and settle the issue, to avoid being tried in the US. He stated that there is a similar case ongoing now that he cannot give details about.

Mr Brown stated that one of the problems is that our laws against corruption are too arbitrary and leave too much room for maneuver. This is why they need to be rethought.

Mr Brown then addressed the question of the proposed R 25 billion in savings. He stated that the OCPO has pledged itself in its performance agreement for the year to save R15 billion. He explained that if the OCPO does not meet this target while under Mr Brown’s command then he will be accountable to the Director-General of Treasury. He added that performance agreements should be written and used more effectively in all departments.

Mr Brown explained some parts of the 30 days’ payment issue. When a company issues an invoice, the Value Added Tax (VAT) is payable to SARS whether the company is paid or not. SARS penalized companies without sympathy if they are late with their tax payments. In many cases these issues do not get resolved. However, black business has donated the funds necessary for the OPCO to set up a new call centre that should help to speed payment. If no payment happens, the Constitution makes it clear that steps can be taken, including withholding money that goes into a department until the department has settled its payments. Departments need to feel what it is like when you do not get paid.

On a monthly basis the OCPO will publish the oversight information and reports to deal with departments that are not paying. Mr Brown gave a personal anecdote of a black 100% women-owned company that was not paid R100 million on time last year. The OCPO had to speak directly to the head of Provincial Treasury to settle the problem and it was eventually resolved. But there are many others cases where the payment does not happen.

This is why there needs to be consequences. If an accounting officer has been found to deliberately have made sure that payments do not happen, they are breaking the law and action must be taken. The OCPO has issued an instruction note (number 3) on 19 April to deal with deviations and variations. This note explains that there are only three cases where you are allowed to deviate. One in the case of emergency. The second case is sole-sourcing, which must be demonstrated to be the case via proper research evidence. Under the new system, accounting officers must report to the OCPO for permission to deviate before they are allowed to. There have been concerns over the ability of the OCPO to process so many deviations; the OCPO has set itself a 24-hour timeframe to deal with deviations. It is good that we are discouraging deviations.

The reforms the OCPO will implement will have an effect on the economy. For any new policy to take effect, there will be some negative shocks as businesses adjust. This does not mean that we should hold back what we are doing. Rather, the OCPO must find a way to help people manage their businesses through the transition. Government sometimes creates artificial economies – the OCPO needs to flush these parts out of the economy, and there will be businesses that do not survive. This does have safety repercussions but the OCPO delegates are taking those precautions that they can.

He assured Ms Mokgosi that the OCPO is learning exactly what its cost drivers are. ICT procurement is close to R20 billion and leases are R12 billion. These are the areas of risk that we are aiming to address with procurement strategy. In the construction industry, we have examined certain contracts and visited these companies. There was a particular company that charged R1.5 billion for a six kilometre road. The company produced the contract and the contract did not reflect the R1.5 billion – this figure was not in their books. Their books were aggregated and it was not clear where the 1.5 figure came from.

A general problem in the construction industry is that the fee structure is percentage based. For example, the fee is 10% of the actual cost. So they will up the quote as far as possible to increase their remuneration. This problem is worsening as a project goes through the system. For example, when a department gets professional designs for a particular project, these designs already include fictitiously large bills of quantities and costs. The department then puts it out on tender, and the bidders will add their own premium, inflating the cost further. By the time the project has gone all the way through the system, the cost inflation is horrendous. The OCPO is finalizing a fee structure for the consulting engineer service, which just needs to pass through the Competition Commission to be enacted.

Mr Maynier felt that his question had not been sufficiently answered.

Chairperson Carrim allowed the OCPO to continue.

Ms Simelane addressed questions about managerial performance. She explained that the OCPO will be introducing a supplier ratings system. This system will work both ways so that the suppliers can rate the departments they have dealt with. This will help with performance management.

Mr Brown then address Ms Mokgosi’s question about standards. He explained that SABS certification is a requirement for all products supplied through transversal contracting. All construction products used must be SABS certified. The problem does not lie so much in construction as in weak contract management. Companies dilute and lower the quality of their inputs to reduce their costs for example. As there is no proper testing and certification during the construction process, gaps appear. Only later when the cracks appear is the problem visible.

Another problem is that government relies on consulting engineers to monitor the quality of actual construction. But if there is collusion between engineers and road builders for example, a road that should last 20 years is resurfaced after one year. The OCPO has over a thousand government entities; it is the responsibility of each and every entity to ensure quality standards when it puts work out on tender. The quality of staff in these entities is therefore also very important. The country needs institutions that work.

Mr Brown then returned to Mr Maynier questions. The OCPO had received the diesel report. The OCPO has gone through it, and Eskom has started to say that it is spending less on diesel. So the OCPO is working on these issues. There is a forensics division in Treasury, within the Office of the Accountant General. The OCPO is working fairly closely with them on many of these cases. The OCPO is trying to put systems in place that will proactively deal with these problems. It is not optimal to only invest resources when mistakes have already been made. Mr Brown indicated that there was not much more that could be said.

Chairperson Carrim asked what criteria are used to determine what goods are procured locally and which goods are procured centrally.

Ms Setan explained that the OCPO gets a very high-level view of what the main categories are when it does an expenditure analysis. The OCPO also takes into account what is important that is procured across government, that could be procured centrally without compromising the quality of the goods and local economic development. It is a tricky question that is best approached on a case by case basis.

Chairperson Carrim closed the meeting with an opinion of his own. He explained that the culture of ‘taking’ [where it is not due – corruption] is partly a structural problem that has arisen from the failure of the government to achieve empowerment. Government officials and politicians need to set the example for civil society. He commended the OCPO on the work being done.

The meeting adjourned.

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