Deviations and expansions of national departments & entities: 2016/17 National Treasury Report

Meeting report

The Chairperson welcomed everyone and said the purpose of the meeting was to receive a briefing from National Treasury on its consolidated report on deviations and expansions for national departments and entities for 2016/17.

National Treasury briefing

Mr Dondo Mogajane, Director-General, National Treasury, said requests for procurements through deviation are acceptable by law but challenges were observed when the deviations were abused by departments and entities. He indicated the legal framework for supply chain management functions and the principles that must be applied based on Section 217 of the Constitution to attain value for money and fair treatment of suppliers. The principles were fairness, equity, transparency, competitiveness and cost effectiveness. An accounting officer could provide for procurement through deviations using Treasury regulation 16A6.4 in emergency situations when it was impractical to invite competitive bids. National Treasury introduced Practice Note 6 of 2007/8 to curb abuse by institutions when it noticed that these institutions were deliberately using provision 16A6.4 to avoid the required bidding process at the end of the financial year. Institutions incurred expenditure at the end of the financial year to avoid surrendering unspent funds. Practice Note 6 required the institution to submit a procurement plan along with its application for deviation. Treasury checked if the deviation was part of the procurement plan and rejected the application if it was not part of the procurement plan.

Practice Note 8 of 2007/8 was introduced to ensure that the accounting officer reported cases were the goods and services were above one R1 million. The report needed to include the type of goods and services, name of supplier, amount involved and why a competitive bidding process was not used. Instruction note 32 of 2011 was introduced to guide the expansion of thresholds for the variation of orders due to the gross abuse of supply chain management. Treasury declined approvals for such expansions if the institution did not seek for approval prior to the expansion.

Instruction Note 3 was issued in 2016 to indicate the reasons for granting deviations from a normal bidding process and expansions or variation of orders. He indicated that the rules were given to reduce procurement through deviations, consider if reasons given for the deviation was justified and confirm that all institutions reported its deviations. The abuse found in the bid process were cover quoting, price inflation, not rotating suppliers and not doing market research, splitting procurement to avoid competitive bidding, expanding amount procured through quotations and tailoring specifications to favour certain suppliers. Also, evaluation criteria were changed during evaluation and adjudication, appointing suppliers at exorbitant prices and using deviations and variations to avoid competitive bidding. An example of abuse of procurement deviations was when an institution waited for the end of the financial year to initiate procurements and then indicated that the procurement was an emergency.

National Treasury constantly reviewed its pre-tender, tender and post-tender violations to ensure that the process was above board. Treasury also did training to ensure that officials in various institutions are empowered to know what should be avoided in the procurement process. He made recommendations such as institutions advertising bids at least six months before the expiry of contracts as the way forward. Treasury would send a written report of all 2016/17 deviations to empower the Committee to fulfil its mandate and was also modernising the process of approval of deviations on procurements.

Discussion

The Chairperson requested quarterly engagements with Treasury and observed that the briefing was general in nature. He asked Treasury to highlight challenges on specific deviations and expansions.

Mr Willie Mathebula, Acting CFO, National Treasury, said Mr Solly Tshitangano, Chief Director: Governance, Monitoring and Compliance would address problematic areas on the spreadsheet. He appreciated the call for quarterly engagements and said although deviations could occur during exceptional circumstances it should not be a norm.

Mr M Booi (ANC) noted from the spreadsheet that out of the R74 billion deviations, Eskom had about R66 billion, South African Revenue Service (SARS) had about R1 billion and the Department of Water and Sanitation (DWS) also had high deviations. He asked how Treasury had allowed the deviations to accumulate to R74 billion. It meant that certain institutions had abused the procurements system and he asked what was put in place to avoid deviations.

Mr Mogojane replied that the deviations were allowed based on the law so it was not illegal.

Mr Booi remarked that he was not blaming any party but he wanted to know what could allow departments to apply for high value deviations. The trend showed that small entities were not involved in deviations but it was common with big entities such as Eskom and he asked what the triggers of deviations in procurements were.

Mr Tshitangano informed the Committee that majority of applications for deviations by Eskom were for procurements on supply to Medupi and Kusile power stations as a result of improper planning. The procurement deviations for SARS were also as result of poor planning because the design process was wrong. The 74 billion included both deviations and expansions on contracts.

Mr Booi said the Committee was concerned that although rules against procurement deviations existed, the big entities abused deviations without consequence management. Procurement deviations are wasteful expenditure and it seemed as if big entities had found a way to loot money through deviations. The Committee had to find a way to stop the wasteful expenditure because funds were lost.

The Chairperson remarked that although NT had rules it could not hold big entities accountable. He asked NT to explain the terminologies conditional support, supported and not supported.

Mr Tshitangano indicated that the terms were used to categorise approval status on procurement deviation applications and explained what each term meant.

The Chairperson clarified that if a conditional support was violated it was a criminal offence.

Mr C Ross (DA) expressed concerns on the severe implications of R74 billion procurement deviations. If Treasury worked towards avoiding deviations and it recorded R74 billion deviations then deviations on procurements of institutions was the norm not an emergency. He recommended that the Committee requested an investigation into the Eskom procurements transactions of supplies to Medupi and Kusile.  He suggested that the wording of the deviation procurement regulation should be changed from ‘may’ to ‘must’ where it occurred to ensure compliance by institutions. He asked if procurement deviations could only occur through emergencies.

Mr E Kekana (ANC) asked if Treasury had enough manpower to deal with training of institutions’ procurement staff and ensure compliance on procurements. He asked for clarity on permanency of officials in Bid Evaluation Committee and Bid Asset Committee and on evergreen contracts. He observed that National Treasury had procurement deviations of about R2 billion and he asked who approved its procurement deviations.

Ms N Mente (EFF) said Eskom had deviations of R66 billion out of the calculated figure of R74 billion and there were allegations of corruption against Eskom. She asked why Treasury had not initiated any disciplinary hearings regarding corruption against Eskom on its procurement deviations. She also wanted to know if Chapter 10 rules allowed Treasury to lay corruption charges for the alleged criminal investigations against Eskom. She asked if NT was able to reach out to all departments and municipalities for training to avoid claims of not being familiar with some procurement procedures. She asked if Treasury had prescribed price lists for items to establish that the price of the items were not being inflated if there are standardised means of developing specifications for tenders.

Mr Booi asked Treasury to state accountability measures for entities that neglected the rules or did not state important information in its application for procurement deviations. He also asked why National Treasury would allow funds to be released when important information in the application for procurement deviations was missing. The Committee should be suspicious and he wanted to know at which point Treasury got involved and if it had strategies to curb deviations and expansions in procurement.

The Chairperson remarked that Mr Booi was asking if Treasury was concerned about the deviations, if it had raised concerns and what it had done to address the situation. He supported Mr Booi’s observations on the suspicious nature of allowing the release of funds when information such as ‘amount of procurement deviation’ and ‘time of contract initiation’ was not stated. There were situations where applications for expansion of contracts were above 100% and he asked for published information on contracts that had been expanded.

Mr Mogajane emphasised that the Committee should not assume that R74 billion in deviations occurred due to abuse and institutions did not break the law when applying for deviations. He agreed that Treasury needed to publish procurements that had been expanded beyond the threshold percentage. Treasury was flexible in terms of training due to budget cuts and allowed institutions to confirm if it needed training. A clause had recently been added on approval of evergreen contracts which stated that institutions needed to indicate if new trends to perform contracts had been identified. This clause had resulted in forcing institutions to follow a competitive bidding process in re-awarding evergreen contracts. He explained how Treasury had recorded R2 billion procurement deviations and said they were accountable to Public Accounts.

Mr Tshitangano informed the Committee that the big entities applied for procurement deviations before the process was initiated and therefore relevant information were not attached because it was not yet aware. The majority of complaints were that specifications were biased. If a supplier complained that an entity’s specification was biased, NT wrote to the entity and the specifications are rectified. Officials often did not check the price if government was buying but this is not the attitude when an official buys an item for personal use. Treasury has put a strategy in place for the entity to recover excess funds. Majority of the evergreen contracts occurred because the bid was advertised more than once hence and Treasury recommended that if the bid process was canceled the first time the entity needed to notify Treasury. Evergreen contracts occurred more if the incumbent supplier was not recommended and this led to the contract being re-advertised. It was also noticed that court cases were used to extend contracts. Emergencies on procurement deviation can only occur if the item has a sole supplier and a limited time frame was needed for the procurement. Some of the emergencies were self-created hence the entity should motivate why the item has to be procured through a sole provider. BEC members are not permanent but BAC members are permanent. The accounting officer may request certain skills and these allowed new members to be on the BAC.

The Chairperson observed that only deviations above R100 million were included in the report which could make the figure increase if the remaining procurement deviations were added.

Ms T Chiloane (ANC) expressed concerns about the negative impact of procurement deviations in provincial departments of health and he asked which departments had not disclosed its procurement deviations.

Mr Mogajane said procurement deviations in the health sector occurred as a result of issues identified earlier such as lack of planning and Treasury mandated entities to submit its procurement plans before procurement deviations were approved. Procurement deviations in the provincial health sector are addressed by Provincial Treasury.

Ms Chiloane said some departments’ procurement deviations were not part of the spreadsheet submitted to the Committee and requested a written submission.

Mr Mogojane said Treasury had records of applications for procurement deviations for all departments however; the report only identified procurement deviations that were of concern. Written submissions could be made to the Committee on all applications for procurement deviations.

Mr Mathebula stated that only procurement deviations above 15% had been highlighted for discussion. The standing prescripts on Chapter 10 institutions recommended the institutions that could be charged.

The Chairperson asked how National Treasury monitored procurement deviations.

Mr Tshitangano replied that Treasury responded to applications on procurement deviations from zero and above.

The Chairperson asked if Treasury monitored all procurement deviations.

Mr Tshitangano indicated that Treasury monitored procurements when it picked up abnormalities.

The Chairperson asked who monitored the Integrated Financial Management System (IFMS).

Mr Tshitangano informed the Committee that Treasury had not been involved with the IFMS then.

Mr Booi asked Treasury to send reports on deviations, expansions as well as procurement contracts before the next meeting.

The Chairperson asked National Treasury to start with its mandates and how it monitored procurements in the next meeting. The criteria would assist the Committee to follow-up on the repots given.

The meeting was adjourned.