SANDF Procurement processes: Chief Logistics briefing

Meeting report

Department of Defence (DoD) procurement: background

Brig Gen Edward Mulaudzi, Director General: Procurements, Department of Defence (DoD) said the presentation was aimed at presenting the South African National Defence Force (SANDF) procurement operations to the Committee. The emphasis would be on the 1 Military hospital project procurement process, and he would explain the differences between acquisition and procurement.

The introduction of the Public Finance Management Act 1 (PFMA) of 1999 required all state departments to conduct procurement in line with National Treasury prescripts, and the DoD had established procurement capability through a Central Procurement Service Centre (CPSC) and Single Public Service Centre (SPSC). In April 2009, these two centres were migrated to the Logistics Division under the command of the Chief Logistics (C Log), SANDF, and new procurement delegations were promulgated in May 2009. DoD procurement was decentralised in 2015, in line with the Defence Review.

The supply chain management (SCM) framework stipulated that if items were demanded and not available, procurement had to start through a demand management process. The items were then acquired through procurement processes. The items were transported from supplier to the warehouse and issued to the demanding entity through logistic processes (accounting and management) until the items were disposed of.

He highlighted differences between DoD procurements and acquisition. For instance, DoD procurements occurred through the General Defence Account (GDA), while acquisition was through the Special Defence account (SDA). In addition, DoD procurements were serviced by a competitive procurement process open to the market, while acquisition was serviced by an industry specific system.

The DoD’s pillars of procurement were value for money, open and effective competition, ethics and fair dealing, accountability and reporting, and equity. On 1 April 2016, it had started making use of National Treasury’s data base. In addition, if a bid was more than R500 000, it advertised through the government tender bulletin. The Department did not use newspapers, due to financial constraints. There would be a briefing session, after which tenders closed. Evaluation commenced, and then the winning tender would be announced. The pre-qualification process had to be completed in a maximum of 79 days, bids within 73 days, new contracts in 121 days, and existing contracts in a maximum of 21 days. In a case of emergency, the whole process could be completed in 30 days.

1 Military Hospital Project procurement

The DoD and National Department of Public Works (NDPW) made a decision that the medical health portion of the facilities’ maintenance functions would be transferred to the DoD, and the first floor of 1 Military Hospital was identified as a pilot project. The Departmental Commercial Procurement Board (DCPB) approved the logistics division’s submission to take over from the consultants, Tectura Architects, who were already on site. The Government Technical Advisory Committee advised that the project could not be renovated without inputs from a medical health technician (MHT) so the procurement of medical equipment was outsourced. The process to appoint an MHT had been initiated.

The achievements to date had been the streamlining of the DOD procurement process from the Secretary of Defence through to the lowest level, the issuing of procurement delegations (no procurement officers did procurement activities directly on their own), the implementation of an e- procurement system, and the establishment of procurement capabilities in line with the delegations of May 2009 and Defence Review 2015.

The following procurement challenges had been identified:

• A delay in the appointment of the MHT due to Tectura Architects’ delay in handing over the tender documents; the terms of reference for the contract had been submitted to the DCPB for approval, and procurement process had been initiated;
• Retention of procurement skills had been difficult, but efforts were being made to master the procurement process:
• The payment of suppliers within 30 days; however, payment forums had been established;
• In the past, suppliers had been issued with fraudulent government orders; however, call centres had been established at the logistics division, and the call centre staff worked with the military police and South Africa Police Service (SAPS).
• Corruption issues during procurement were been mitigated by the vetting of all DoD procurement personnel and bid adjudication members;
• Deviations that occurred as a result of National Treasury prescripts; the DoD was still looking for solutions to this challenge.

Discussion
The Chairperson asked how suppliers had been able to get fraudulent government orders. How did corruption take place during procurement? How did the deviations that occurred as a result of National Treasury prescripts affect the DoD?

Brig Gen Mulaudzi responded that fraudulent government orders occurred when suppliers received an invitation to supply a bogus item. The inquiry was usually done through personnel who were not procurement staff, and in most cases they were directed to a bogus company to source the items. Then they contacted the bogus company and paid the money for delivery, but delivery was not made. Sometimes these suppliers were paid the money and the items were delivered to the wrong place. During a “suppliers’ day”, the DoD had explained what government orders looked like. Fraudulent orders were not being initiated by DoD’s designated staff, and defaulters were being investigated. Military police and Defence intelligence had given an instruction that all procurement personnel had to be vetted and screened, and lifestyle audits were also being carried out. Those who did not qualify for security classification were not allowed to be procurement personnel.

National Treasury prescripts affected the DoD as a fighting force. In most cases, it struggled either internally or externally to get its forces on the ground in such situations. The DoD had a list of what soldiers need when they are on deployment, but when instruments of procurement are changed, this results in many deviations. The DoD would then be forced to set up an ad hoc deviation committee that would give a ruling to support the deployed soldiers.

Mr S Marais (DA) expressed concern over the inappropriate procurement issues that had been observed during the oversight visit. The Committee had noticed that the Special Forces and the Air Force lacked equipment. Normal routine maintenance of grounded aircraft had been halted because procurement activities had not been completed. In addition, any procurement above R2 000 had to go through the central procurement office. He observed that 21 and 28 squadrons were strategic to South Africa because they were used to transport important people, including the President. The procurement process was not saving the DoD money, but rather costing the country money, it could not be said to have been streamlined, and it should not be listed as an achievement. He asked what the challenges in finalising the updated procurement policy were, and what the major procurement problems were for squadrons 21 and 28.

Ms N Mnisi (ANC) observed that the targets set by the DoD had not been achieved due to procurement processes. She asked what the current state of the procurement policy was. What strategy was the DoD implementing so that procurement did not become a stumbling block to achieving its procurement policies? Who were the architects working on 1 Military Hospital?

Why had there been significant delays in purchasing medical equipment?

Mr S Esau (DA) said the DoD claimed that its procurement processes had been decentralized, but the Committee’s experience was that procurement was its greatest challenge. The Special Forces, navy and air force did not have equipment, so Special Forces could not train its personnel. Procurement challenges had also been observed at 1 Military Hospital with the delays in sourcing medical health equipment. No penalties were being imposed on suppliers that did not deliver items on time, irregular spending had been recurring, and claims of procurement doing a good job were not truthful, because the bogus suppliers should have been vetted in the first place. He asked what the role of the Departmental Commercial Procurement Board (DCPB) was. What effect had procurement prescripts had on the DoD? Why did it lease cargo aircraft? Why did it have unreliable suppliers, even though procurement claimed that the suppliers had been vetted? He asked for an update on the contract for mobility packages used for border safeguarding operations. What was the progress on refurbishing military hospitals? He also asked for an update on codification issues.

Mr N Khoza (EFF) commented that a procurement department was important, but people had made it a playground of corruption. He congratulated the DoD on finding a way to solve issues of scams associated with procurement, provided it put the right call centre staff in place. He said the Committee was not pleased with the DoD because it was not achieving its procurement targets. He asked the Department to assure the Committee that procurement targets would be met subsequently.

Department’s response

Lt Gen Morris Moadira, Chief of Logistics, SANDF, responded that his experience as a commander had shown that junior officers who did not have the full picture addressed situations negatively by reporting dated challenges. He had not observed any of the negative trends, and would investigate this report and give feedback to the Committee. He would investigate the issue of spares parts and equipment that were needed for aircraft refurbishing. He said that the DCPB had advised the DoD to continue with the consultants (Tectura Architects) who had started the 1 Military Hospital project. However, the consultants had deceived both him and Brig Gen Mulaudzi in saying that the tender documents were ready. Therefore, the procurement process would not be completed until next year. The DoD was not happy with the frustrating situation and was committed to finding a solution to this challenge.

Brig Gen Mulaudzi replied to the comments on the streamlining of procurement processes. The DoD’s approach to achievements in this area was based on the structuring of its documents only. The elements which the Committee had highlighted would be evaluated and the DoD would find a solution to the challenges.

He admitted that 1 Military Hospital had procurement challenges, as indicated by Lt Gen Moadira, and the C Log had committed to manage the situation. The Department of Public Works (DPW) had handed over the consultants, Tectura Architects, to C Log under the impression that the terms of reference (TOR) were fair. However, the consultants had been delaying the procurement process. C Log was struggling to get relevant information about Tectura Architects, and this had made it difficult to hold them accountable. The DPW had actually determined the scope of work for the hospital, but the consultants had not delivered on all the outputs expected in the TOR and this had contributed to delay in the procurement process.

He said that the C Log would trace the report on Special Forces and investigate the issue. With regard to the aircraft spares, a slide in the presentation had explained the difference between procurement and acquisition.

The Departmental Commercial Procurement Board (DCPB) was an adjudication board for procurement of items above R10 million. The DoD had exempted the purchase of items of up to R5 000 from going through procurement processes, and C Log used petty cash to procure these items.

The DoD was supposed to have finished updating the procurement policy during the 2015/16 year, bit it had been delayed due to the requirement of getting a Centralised Suppliers Database (CSD) for procurement processes. A CSD was given as a requirement for procurement processes with effect from 1 April 2016. Consequently, the new target date for the updated procurement policy was the end of this financial year.

The procurement prescripts applicable to all state organs had made it difficult for the DoD to operate successfully as a military entity, and the use of these prescripts would make it difficult to meet what was required as a country. The Squadron 21 and 28 issues would be followed up and the Committee would receive feedback.

The leasing of cargo aircraft was a big challenge, but the DoD had no option because the Military did not have its own cargo aircraft. The suppliers that had been awarded the tender out-sourced the cargo aircraft from Russia, so the Military had no alternative but to manage the situation until the contract expired at end of this month. A decision had been taken not to extend the lease period as a result of the challenges the DoD had had with the leased aircraft from this supplier. There may, however; be another outcry by end of November, as the supplier needed to be paid within 30 days.

Brig Gen Mulaudzi said the issue of unreliable suppliers occurred because ‘tenderpreneurs’ tendered for every contract. These ‘tenderpreneurs’ applied for contracts that they did not have the capacity to undertake -- it was a situation where a contactor could apply to supply anything ranging from machine guns to even ballpoint pens. In DoD procurement policy, contracts that were less than R500 000 were not open to the market, but if the contact was above R500 000, it was open to the market and consequently any contractor could tender. Therefore, if the evaluation of tenders was not well carried out, a tenderpreneur could win a tender for maintaining an aircraft. The challenge came when the tenderpreneur transferred the contract to another company because it did not have capacity to undertake the contract.

He conceded that the DoD was a bit lenient in penalising defaulting companies. This would be addressed in the new procurement policy. All companies registered in the Central Supplier Database (CSD) were vetted, and if these companies defaulted they were removed from the data base and the contact was terminated.

The biggest challenge in the DoD was the skills gap, which had resulted in irregular expenditure. This challenge was being addressed in conjunction with the chief finance officer (CFO) logistics.

The Mobility Package contract was a project to enhance the operation of troops at the border. The normal Land Cruisers were modified into operational land cruisers that had roll bars to prevent accidents during border operations. However, the contract issues had been resolved.

The call centre staff ran it well and would deliver on their mandate.

-The meeting of targets was a critical point that C log was committed to and the issues raised by the Committee although strange would be resolved. The procurement policy would be updated by end of the financial year.

The DoD had the internal capacity to demolish and refurbish buildings. As a result, the pharmacy in the military hospital had been moved from the first floor to the second floor for the convenience of the patients.

Lt Gen Moadira reported that Codification was a new entity within the logistics division. The personnel employed were contract workers, and they would be verified and approved by the DoD.

Mr D Gamede (ANC) stressed that the C Log must hold the consultant, Tectura Architects, accountable for the delay in the procurement activities of 1 Military Hospital. He advised them to get written legal advice on Tectura Architects and also to submit this advice to the Committee. He added that Tectura Architects was an Australian company that had offices in Pretoria.

The Chairperson commented that Mr Gamede had just given C Log and the DoD information that would assist them to hold Tectura Architects accountable.

Mr Marais said that an entity may have the best laid out plans on performance, but if these were not implemented, then the process had not been streamlined. Some procurement activities might not be practical as a result of military inflation and asked what, in the DoD’s opinion, constituted military inflation. He suggested the process of military vehicle disposal by auction should be used as a method of generating revenue. What was the current process of military vehicle disposal? Did the funds generated from military vehicle disposal get into the Central Revenue Fund?

Mr Esau advised the C Log to ensure that all suppliers were subjected to a lifestyle audit before they were allowed to take part in the procurement process. He asked what the maximum daily amount was that the DoD could spend on items. Was the R5 000 pegged for petty cash used for each item, or per case? Do the procurement personnel undergo lifestyle audits? Was there a unit in the procurement office that checked for inflation in market prices?

Brig Gen Mulaudzi appreciated Mr Marais’s comments on the implementation of performance plans and procurement functions, and made a commitment to work on them.

He said that the R5 000 petty cash limit was used per procurement case, and not per item. Furthermore, the C Log’s request for an increase in petty cash to R10 000 had not been approved because it was not considered safe to carry large amounts of cash around.

He committed to give feedback on what constituted military inflation. The process of military vehicle disposal was system wide. The vetting exercise incorporated lifestyle audits for procurement personnel. There was no specific unit that presently verified market prices, but the procurement officer and end user jointly made an effort to verify the market price.

Conclusion

The Committee complimented the DoD for the excellent work done on defence formations and also congratulated it on its achievements at 1 Military Hospital.

However, it expressed deep concern about the new issues picked up during the oversight visit of 19-23 September, 2016. Furthermore, the C Log SANDF was invited by the Committee to answer questions due to the serious nature of the issues that had been discovered during the visit. It emphasised that the C Log SANDF and DoD should address the concerns raised and make written submissions where they were required. The Committee was committed, however, to assisting C Log SANDF and DoD to become a successful entity.

The meeting was adjourned.