Office of Chief Procurement Officer: progress report by National Treasury

Standing Committee on Appropriations

24 April 2018
Chairperson: Ms Y Phosa (ANC)
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Meeting Summary

The Office of the Chief Procurement Officer (OCPO) met with the Standing Committee on Appropriations (SCOA) to discuss the work of the OCPO. The OCPO presented a briefing report, highlighting new initiatives, the progress of the Public Procurement Bill, major challenges to OCPO, and developments since previous meetings. Much of the presentation focused on modernization initiatives within OCPO, including the implementation of the Central Suppliers Database (CSDB), a Contract Management Framework (CMF) and the development of state-owned construction contracts.

Several members expressed dissatisfaction at the slow pace of OCPO. There was widespread concern about the escalating costs of many public projects. Among the projects discussed were the Moloto Rail project under the Passenger Rail Agency of South Africa (PRASA), the Kusile & Medupi Independent Power Producer projects and the nuclear build programme under the Department of Energy, and the Mzimvubu Water Project within the Department of Water and Sanitation. Several members expressed concern over corrupt tender practices, and a failure of National Treasury (NT) and OCPO to dealt out appropriate punitive measures. Members also expressed displeasure at the fact that state departments were often entering into contracts with foreign suppliers. Members urged OCPO to find ways to procure goods and services from local suppliers.

OCPO responded with several points. Delegates pointed out that modernisation initiatives should improve transparency and make corruption more difficult to hide. Several steps had been taken to reduce conflicts of interest; OCPO had worked to make it illegal for public servants to do business with the state. There were some complications and further work and investigations were being done to fully stop state employees from contracting with the state. OCPO explained that delays were due to the complicated nature of the legislative environment of OCPO, along with a lack of internal resources. OCPO also cited a lack of power of itself, the Auditor General (AG), and other oversight institutions, to hand out punitive measures when corrupt or inappropriate practices were found. Another major problem for procurement was the indebtedness of state organs, which made it difficult or impossible for these institutions to provide sound procurement plans to OCPO.

Both the OCPO and SCOA agreed that the Appropriations Bill could address these challenges, and that it was therefore priority. Both noted the need for effective and timely processing of the Public Procurement Bill Bill.

Meeting report

The Chairperson introduced the purpose of the meeting. The Standing Committee on Appropriations (SCOA) dealt with all the spending of government. In this sense the Office of Chief Procurement Officer (OCPO) was an important partner in achieving SCOA’s objectives. SCOA intended to change the status quo in government and “turns things around” to create value for money for the taxpayer. She welcomed OCPO and National Treasury (NT) delegates.

Briefing by Office of Chief Procurement Officer (OCPO)
Mr Schalk Human, Chief Director: Supply Chain Management, OCPO, introduced the presentation. The OCPO was being modernised in four ways. Firstly, the legislative framework was being reviewed and modernised. Secondly, procurement activities were being simplified, standardised and automated. The current procurement practices were complicated – the operative model should be simplified and standardised. The third area of modernization involved the “smart” and increased of technology in Supply Chain Management (SCM). Technology offers opportunities to create inclusive growth. The fourth area of modernisation was the development of government SCM capacity and the professionalization of support.

Ms Mpho Nxumalo, Chief Director: SCM Policy and Legal, OCPO, discussed changes to the OCPOs legal environment. The legal framework of OCPO was going to be addressed in the Public Procurement Bill (“the Bill”). There should be one legally standardised Bill for all government procurement. The draft Bill had been sent to the Office of the Chief State Law Advisor (OCSLA), it was considered by OCSLA and returned to OCPO with comments, and it had since been sent back to the legal advisors to be considered again. It was currently being considered by OCSLA. From OCSLA it would then be submitted to cabinet for approval, before it was released for public comment.

Ms Nxumalo discussed the contractual environment at the OCPO. The current contracting documents used by OCPO were too generic; template contracts that were specific, for example to particular commodities, would be more appropriate. This problem has led to litigation against the OCPO. Additionally, much of the work performed for and arranged by the OCPO was not done so under a formal contract [due to a lack of an appropriate document]. The development of a Contract Management Framework (CMF) aimed to improve contract management and address irregular and wasteful expenditure.  In certain situations where there were currently no contracts, the CMF guide would facilitate contracting by specifying how a contract might look.

Ms Mxumalo continued. The “Development of State Owned Construction Contracts” project was underway. The goal was to provide standardised contracting for state-owned construction. Currently, contracting standards were driven by the private sector and this disadvantaged the state. This negatively affected several institutions such as the Joint Building Contracts Committee (JBCC) and the New Engineering Contract (NEC). The initiative would enable the state to be able to influence the content of contracts and to bring the contracts in line with the regulatory framework and legislation such as the Public Finance Management Act (PFMA), the Municipal Finance Management Act (MFMA), the Preferential Procurement Policy Framework Act (PPPFA), and other relevant legislation. The initiative would also enable the state to align its contracting with the country’s socio-economic requirements. She added that the current contracting environment did not address Black Based Empowerment (BBE) and preferential procurement regulations.

Mr Human described the Central Suppliers Database (CSDB). He stated that technology is a powerful lever which could provide transparency and break down barriers to entry. Suppliers in government are like an old boys’ club; the sector is concentrated and difficult for new competitors to penetrate. The central supplier database provided transparency on this fact. For example, in 2015, only 57 000 suppliers benefitted from state procurement. The central database consolidated close to 3 000 separate databases into one. As of the meeting there were 650 000 users registered on the database of which 470 000 were legally registered and compliant. It was used by almost 830 organs of state. The database helps to establish how much state procurement goes to targeted groups as per PFMA and BBE policies. It is a very powerful tool in this regard. The second benefit of the central supply database is that it removes a significant amount of duplicated effort. The database is integrated with the South African Revenue Service (SARS), the Companies and Intellectual Property Commission (CIPC), and the Department of Home Affairs (DoHA).

Mr Human continued. The establishment of the CSDB was initially to enable eProcurement. The traditional (offline) method limits government to inviting only three quotations, however, electronic procurement on the CSDB allowed government to receive as many quotes as it wanted. This change was an important step towards inclusive growth, because any firm, even a small firm without “inside connections”, could make a bid. The OCPO was aligning the eProcurement system with National Treasury’s Integrated Financial Management Systems (IFMS)

Mr Human continued. The eTender portal was also established. It provides a single point of access to tenders from different areas. To date more than 35 000 tenders had been listed and the portal received more than 7 500 visits per day. The requests for service are posted by more than 600 organs of state. The eTender portal can be used free of charge. This was another important change- previously the state charged firms or individuals a significant amount for access to tender documents. This constituted a barrier to entry; tender documents should be free as this encouraged inclusive economic growth.

Mr Human mentioned the future of the electronic system. There were still some functionality problems with the portal that needed consideration. Ultimately, the system should progress to provide many functions including cataloguing, online auctions, multiple tender awards, transversal contracts, and a framework for contracts. OCPO was eager to progress towards a fully-fledged eProcurement system which can facilitate competitive bidding and provide reports on four issues:

-State of suppliers. How transformed are firms, what size are the firms being contracted, and of what legal types?

-State of expenditure. Who is getting state business, and for what commodities? Was there oversupply or undersupply in certain sectors?

-Transparency in government tenders. Are tenders published regularly, is there competition?

-Transparency regarding public employees conducting business with state. How many public servants are doing business with the state, who are they, to what value is the business, and which departments are worst effected?

Ms Estelle Setan, Director: Strategic Procurement, OCPO, discussed new initiatives at OCPO. OCPO had run a strategic procurement awareness campaign in the provinces. 25 awareness sessions were completed and OCPO found that people were “hungry for information”. The response was overwhelming and extra sessions were being held. Strategic procurement is logical and not complicated; organizational structures need to be adjusted to minimalize the energy wasted unnecessarily on procurement. She noted a need for differentiation between the administrative role and the role of a buyer. OCPO found that there were large weaknesses in contract management and negotiations.

Ms Setan stated that capacity building and the updating of organisational structures was necessary. OCPO was busy developing sourcing strategies in the health sector with the assistance of the Department of Health (DOH). Over 200 specifications for medical equipment had been standardised. Thanks to this work all provincial departments were now using standard equipment. She noted buy-in from the DOH. Sourcing strategies were also being updated for medical waste management, cleaning and food services. She noted that some sourcing was better centralised, whereas other sourcing was more suited to decentralization. Specifically, laundry, waste management, cleaning and food were best provided in a decentralised manner, while equipment was better suited to centralised sourcing. OCPO had still development and implemented standards for the cases that were decentralised. These services were now standardized across provincial health departments.

Ms Setan discussed Learning and Teaching Support Materials (LTSMs). OCPO had examined the procurements models that were used across the provinces for LTSMs. She noted that there had been significant “push back” to OCPO initiatives from provincial departments that were reluctant to change their practices. OCPO was working with the national Department of Basic Education (DBE) to overcome this challenge. The eProcurement portal was also helping DBE to create a standardised system for education procurement and delivery. If properly implemented this could save the state a lot of money. However, she also noted that some schools were not developed enough to be ready for eProcurement and electronic education tools such as tablets and computed.

Ms Setan discussed travel interventions. OCPO was reviewing travel policy with the goal of creating cost containment and the standardisation of travel management and technology. OCPO wanted to establish a national framework. A platform called Travel Technology Business Case had been developed that would provide a single place from which state travel bookings will be made. It had been approached and would provide the state with visibility on the travel spending. The system will operate in a similar fashion to Trivago on a “procure to pay” system. This would improve competition as all air transport suppliers would listed on the portal. The system would contain budget controls automatically built in. She noted that travel expenditure was 5th largest category in government’s goods and services expenditure.

Mr Peter Ntombemi, Director: Transversal Contracting, OCPO, discussed property and leasing. The OCPO had surveyed the country and found that ports and small harbours were underdeveloped. In 2010, the GDP contribution of ports and harbours was R54 billion. If handled correctly, it was estimated that “revamping” could allow them to contribute as much as R177 billion. The reform/revamping project was being done in conjunction with the National Department of Public Works. At the time, in terms of investment and revenue, the project is at advance stage awaiting approval of the framework. While in terms of savings, the project is at initiation stage as a result of structural changes that affect the proceeding of the project.

Mr Ntombeni noted that there were state-owned properties in coastal and inland areas that were rented or leased on contracts written as long ago as 1950, with the rental amounts stuck as low as one pound per year. The state should be earning from this land. On the other hand, the government itself paid too much for the land it rented: often 20%-30% above the market rate.

Ms Ragadie Motseto, Director: Stakeholders and Client Management, OCPO, discussed curriculum reforms and supplier/practitioner development. OCPO was influencing the curriculum that taught SCM. The intention was to assist employers so that when recruiting from universities and colleges they had an idea what the candidate knew about SCM. The programme would also support lecturers by providing relevant textbooks. OCPO did not accredit or assess SCM trainers and there was a concern that the system was not sufficient processing these trainers, who may be dealing out inaccurate information. Trainers in SCM were supposed to be accredited by the Skills Education Training Authorities (SETA); however SETA accreditation was slow moving and often trainers were not properly informed.

Ms Motseto said OCPO had been approaching suppliers because suppliers seldom responded to their invitations. OCPO has noted poor supplier development spending. Many suppliers do not understand quality and simply use the price of a good as a gauge of its quality.

Ms Motseto discussed non-payment. She stated that since the introduction of the [new] instruction mode, there was R1.3 billion recorded in non-payment. R 368 million of this had been collected by OCPO so far. The most problematic sectors were the health sectors in Gauteng and Mpumalanga.

Mr Solly Tshitangano, Director: SCM Compliance Monitoring, OCPO, discussed procurement. He brought up two problematic types of contracts. The first he described as “red contracts”.  These are contracts that are entered into either due to an emergency scenario, or because it is inappropriate to invite competition. He stated that once the contract is entered into, the colour changed from red to green. The scope of the contract is then broadened, and the period of the contract is extended from a one-term procurement to a medium or long-term contract. The second type he described as “yellow contracts”. These are advertised and have a short period and a small scope. Once they are awarded, the colour is also changed to green, and again the scope broadens, and the period is extended.

Mr Tshitangano described major procurement deviations. The first was the Moloto Rail project under the Passenger Rail Agency of South Africa (PRASA) which was budgeted at R60 billion. PRASA wanted to appoint the China Communication and Construction Company (CCCC) to fund and build the Moloto rail corridor through deviation. OCPO advised that there should be no deviation. The problem for OCPO in this case was that the funding was not separated from procurement. A bank should first be approach for funding, and then later a process of competitive bidding can happen. In this case PRASA wanted a “turnkey” project where it funded the project and appointed the supplier. This is disagreeable as contracting is then outside of government control and its procurement objectives. OCPO did not grant PRASA deviation as there was no emergency or reason for deviation. 

Mr Tshitangano mentioned that the South African Broadcasting Commission (SABC) had requested a deviation to appoint three labour brokers to provide specialised skills. The value of the contact was estimated to be R19 million. OCPO did not support the deviation. Transnet had requested that a contract to the value of R196 million be extended for seven months – OCPO had allowed it to be extended by two months. This was an example of a problem present in other entities and national departments. In many cases institutions wait until the present contract has expired or is near to expiring, and then attempt to extend it. Often there is no option to not do so at this point as the service is essential. Another example was a correctional services food contract: they [the department or relevant state organ contracting the service] approached OCPO in the same month the existing contract expired. They should have advertised the contract long before.

Mr Tshitangano discussed a contract in Transnet given to private company T-Systems. The contract was extended several times on the basis that T-Systems would outsource a supply development partner. This was where issues arose with “Gupta-related” subcontractors that were “brought in through the backdoor”. A supplier was given the responsibility to source the supply development partners. He stated: “this is exactly what happened with Mackenzie and Transnet, Mackenzie and Eskom”. A main contractor is appointed, but they have the authority to bring a supply development partner.

Mr Tshitangano explained that in the case of Kusile power plant, a contract had been extended several times. In 2017 the suppliers requested that the contract be extended, and NT took their request in good faith. An article in the Sunday Times later came out suggesting that the NT was colluding with the company in question to give deviations that should not have been granted. The initial amount of the Kusile build was R57.7 billion, but the reports the supplier gave NT last week estimated the total costs at R83 billion. In the case of Medupi, the initial amount was R48 billion, but the most recent estimation was R86.5 billion. These would be categorised as yellows contract.

Mr Tshitangano mentioned the Department of Energy (DoE) nuclear build programme. The estimated cost would be R1 trillion. OCPO had not agreed with the procurement approach of the DoE. The DoE did not want to advertise the contract but preferred to approach the embassies of countries that could build the necessary structures. The DoE following this will appoint a country to be the provider. The OCPO disagreed with this approach. The Department of Water and Sanitation wanted to appoint suppliers on behalf of government, outsourcing its responsibilities. This was a “Section 29 departure”. The Mzimvubu Water Project was estimated at R20 billion; the department wanted to appoint the China Communication and Construction Company (CCCC) to fund and build the dam. OCPO did not support the deviation.

Mr Tshitangano gave examples of how costs went beyond estimates. Often a procurement plan would estimate a certain amount, but bids would then be far above this estimate. Then, when the contract was underway, the total costs would end up way above the suppliers’ estimate. For example, under the Department of Water and Sanitation, the upgrade of the Olifantspoort and Ebenezer project was estimated to be procured at R20 million. The appointment ended up being for R40 million. By 3 July 2017 total invoices not paid amounted to R128 205 606 while total invoices paid amounted to R75 459 673 by 7 July 2017. The Department did not have this money to give to the implementing agent. In another case a hospital did not have water and due to this emergency a “red” contract was necessary. The contract was then broadened and extended, and costs grew beyond estimates.

Mr Tshitangano stated that in these cases implementing agents often ended up in debt to suppliers. The implementing agent would then be audited, and the expenditure classified by the Auditor General (AG) as irregular. The matter is often then brought to the OCPO to decide whether it can condone the expenditure. NT often does not condone this expenditure, especially if insufficient action had been taken against the individuals to blame. Often reasons provided for why OCPO should condone the irregular spending were very weak. Eskom for example did not advertise a tender claiming that the CSDB was offline. However, there was no evidence at all to this claim and it did not make sense to take it on good faith.

Mr Tshitangano continued. The Director General of National Treasury had established a task team to review current procedures and processes. The provision to deviate from competitive bidding was contained in 2005 Treasury Regulations. Abuse of this provision was noticed as early as 2006. NT released two notes in 2007 to address the abuse of this provision and introduced reporting to National Treasury and the Auditor General. Further instruction notes were issued in 2011 and 2016 to address the same abuse and introduce the publication of deviations on a quarterly basis. However, current measures were not reducing the number of deviations. He felt that stricter penalties needed to be in place to stop “them” [companies/individuals] from incurring costs far beyond estimates.

Mr Tshitangano continued. Currently, when condonation was sought from OCPO, if the amounts were high and the only penalties issued had been verbal warnings, OCPO often required that an inquiry be started. OCPO was happier to consider a condonation after an inquiry had been done. In one case regarding the Department of Water and Sanitation, several warnings had been issued. However, all of the letters of written warnings concerning irregular expenditure [from long before, perhaps accumulated over the year] which were submitted to OCPO as evidence were dated with the exact same date. This was clearly not sufficient or valid remedial action.

Mr Tshitangano continued. While OCPO had started publishing deviations, deviations had not reduced. The OCPO needed the help of parliament to create effective regulatory policy. Internal audit units and audit committees were not effective. There was always a risk that these institutions’ reports were influenced by the organizations they audited.

Mr Tshitangano closed the presentation by discussing procurement plans. OCPO had introduced the submission of procurement plans. The idea was intended to get institutions to plan sufficiently. The submission date for these plans was 31st March every year. The plan should include a proper cash flow framework with requests for funding from NT. However, a problem was that many of the institutions were highly indebted and did not have balanced books with which to create sound procurement projects. Parliamentary committees often refused to appropriate funds because the funds would be spent on accruals and not projects. Often provinces went bankrupt in this fashion; because they could not appropriate to repay suppliers. Committees and those responsible for oversight needed to decide how to get departments to solve their accrual problems before requesting and enlarging their procurement plans. Otherwise departments will simply keep the accruals in their books and try to take on new contracts, adding to the debts until bankruptcy happens.

Discussion
Mr A McLoughlin (DA) was concerned that the OCPO was acting too slowly. The Cabinet Resolution of 2014 had resolved that the OCPO needed to act faster to reform and modernise supply chain management. However, discussion of slide five reveals that the CMF was still being finalised. The CMF was supposed to address irregular expenditure… why was did it take as long as three and a half years to reach draft status? Money was being wasted and OCPO was “sitting on its hands”.

Mr McLoughlin referenced slides 13 and 17 and asked why state departments and the OCPO were content to appoint a Chinese construction company to fund and build the Moloto rail corridor and the Mzimvuba dam. Why were they hiring the Chinese? Doing so improved the Chinese economy at the expense of South Africa - surely [South Africans] we can do this work ourselves? We’ve done these types of projects before, so why not employ our own labour? Slide 13 mentioned an estimate of R60 billion for the Moloto rail corridor. This money should not be leaving the country. The fact that we are not doing it locally reflects a total lack of proper planning. He stated that he was “flabbergasted”.

Mr McLoughlin discussed slide 18. What does it mean that the budget was R20 million but the appointment was for R40 million. What does this mean? How did this happen? Did a head roll? He noted also that the amounts paid out amounted to R75 million, twice the appointment price, yet still there was another R128 million outstanding. Had this amount been paid? Lower on the slide, the same pattern emerges. The estimated cost was R96 million, yet this later swelled to R2 billion. These figures are so far apart, and both are “estimates.” What is going on? What techniques are being used that such large discrepancies could arise?

Ms D Senokoanyane (ANC) asked how the OCPO addressed non-compliance. Non-compliance was a major cause of wasteful expenditure. How would government ever deal with this problem? How do we enforce compliance? She felt that travel initiatives and the centralisation of travel booking were good ideas. She asked if the budget for travel would also be centralised or if it would remain on a department by department basis? Promoting competition is a good way of lowering costs.

Ms Senokoanyane discussed slide 13. What does “PRASA wanted to appoint China Communication and Construction Company (CCCC) to fund and build Moloto rail corridor through deviation” mean?  Similarly, please explain what “advise not to deviate” and “deviation request was not submitted” mean. Were these slide bullets discussing the same company?

Mr M Maswanganyi (ANC) asked about Eskom and “the issue of the IPPs” [Independent Power Producers]. He stated that the budget for this issue was very high, but, undoubtedly, Eskom could manage to fund this. He raised the Public Procurement Bill and the fact that it still needed to come back to OCPO before being released for public comment. Perhaps the Committee was “ahead of processes” to be discussing the Bill while it was still at OCSLA. 

Mr N Gcwabaza (ANC) commented that the Bill had been coming for a long time, from as far back as 2014. Did the OCPO have an idea of when it would reach parliament?  He commented that bills cannot linger forever and must be processed consistently and without delay. It was no good that an unfinished Bill be rushed at the last moment as a poorly written Bill is unlikely to be signed (by the president).

Mr Gcwabaza stated that there was “sheer, blatant corruption” going on. He felt that in the past NT had not been frank with the Committee; the Committee had asked for (and received) quarterly reports from OCPO but these reports were “too diplomatic”. However, he appreciated that the tone of OCPO in the present meeting was “more frank”. He stated that the damage had been done and was painful.

Mr Gcwabaza discussed tenders. There are many companies that register with the OCPO, including foreigners, taking on infrastructure build programme and so on. Do we [OCPO/committee] know how many foreign companies are in the country and their types of procurement? Is it possible to break down the nationality of suppliers by sector? South Africa needs these jobs. Economic transformation will falter, and South African jobs and income will be expatriated if foreign firms dominate procurement. Government and OCPO should be giving tenders to South African firms – South Africa comes first. Only in the case that there are no relevant skills in South Africa for a given job should the procurement involve foreigners.

Mr Gcwabaza stated that many “budget abuse” practices were hidden and difficult to detect. He asked OCPO to advise the committee on what to look out for when it is considering and approving budgets.

Mr M Paulsen (EFF) reiterated Mr McLoughlin’s argument that South Africa should not be importing locomotives when it had previously built them 150 years ago. This kind of work is essential in a developing state. South Africans need to build their own cities. NT and especially OCPO officers should be leading and advising on this matter. South Africa has skilled individuals who should be performing many of the functions that are now being imported. He reminded NT that their function is to “take care” of South Africa’s money.

Ms S Shope-Sithole (ANC) stated that she would have collapsed [out of stress] if it was not for slide 2.2 [CMF development] which gave her some hope. An integrated financial management system was a related project that OCPO should be cognisant of. She stated that green contracts were as important and worrying as yellow contracts. Green contracts were the ones that exclude the marginalised parts of society. These “evergreen” contracts hold back economic growth. Contracts should be distributed throughout society so that woman, the poor and individuals living in rural areas have access.

Ms Shope-Sithole stated that NT is accountable to the constitution and that it was supposed to be a father figure that represents accountability and responsibility. She added that NT had not been accountable and there were consequences. In AG reports, one can count seven years wherein the reports contained the same three items: 1) a lack of leadership 2) a lack of consequences and 3) a lack of compliance. All three were problems of NT. An institution cannot preach what it fails to implement itself. NTs mandate is to provide exactly these things, so it cannot claim ignorance of this role. What punishments had it done for bad behaviour?  NT had not condemned KPMG. NT receives huge amounts of money but had not produced benefits for the country. 

The Chairperson stated that the cabinet resolution for 2020 supply chain reforms was made in 2014. Why were things so slow? The matter is still being processed today. Meanwhile corruption has increased. Government needs to be responsive; OCPO has been too slow. The presentation stated that the Public Procurement Bill was with OCSLA – when was it submitted thereto? When did OCPO expect it back? The presentation mentioned many reforms, such as in technology, health, education, and property. What are the timelines for each of these reforms? How could the committee and other committees monitor these reforms and support them?

The Chairperson stated that the current measures taken by OCPO had not reduced the number of deviations, as the presentation mentioned – what can be done? The presentation mentioned that SABC, DENEL and PRASA had not submitted procurement plans. What were the implications? She asked OCPO to advise the committee on whether parliament should approve these firms’ budget allocations if they had not submitted procurement plans. She asked that OCPO provide an honest answer.

Ms Nxumalo described the timing of the Public Procurement Bill. She stated that it was true that the decision [cabinet resolution] was taken in 2014. In 2015 the OCPO decided it first needed to assess the “legislation landscape” of OCPO and public procurement. The report that resulted proposed directions for OCPO reforms and this was the basis upon which the Bill was created. The OCPO then looked at international best practices and procurement legislation. The first draft Bill was formulated in 2016. OCPO then consulted with public institutions in all three spheres of government. Following this, the draft Bill was submitted to the legal unit [of NT] in late 2016. It was adapted into appropriate legal language and this process was completed in July 2017. The OCPO then submitted the Bill to OCSLA to advise on the constitutionality of the Bill. The OCPO received feedback by late 2017 and began consideration. The legal team adapted the Bill and by end of March 2018 submitted it back to OCSLA to be finalised. It was presently not clear by when this would be complete.

Ms Nxumalo responded to questions regarding delays. A challenge for OCPO in completing the Bill was the structure of the OCPO. There were delays in the development of the Bill due to a lack of internal resources. This had also caused delays for the CMF. The first phase of the CMF had been completed and implemented in Kwazulu-Natal (KZN). It was now ready to be rolled out to “all institutions.” It was partially implemented in KZN and Gauteng. The second stage will develop the entire framework. The CMF was primarily delayed due to a lack of internal resources. OCPO would operate more quickly if it had more resources.

Mr Tshitangano responded to Mr McLoughlin on why public procurement did not use local suppliers. The OCPO had highlighted problems within institutions. The Committee should engage with departments and ask them to explain their proposals. For example, the OCPO might meet with an institution and say that it disagrees with “the R20 billion” [referring to the Mzimvubu Water Project on slide 17] but they [the department in question] will “hide” and make excuses. When OCPO refused these cases, departments then go from “Minister to Minister” until a Minister is convinced to sign off on the project even if it is not in line with the constitution. They will request exemption from certain constitutional clauses. The accounting officers and accounting authorities should engage on this.

Mr Tshitangano felt that most of the issues within the Department of Water and Sanitation would be dealt with in the joint enquiry between SCOA, OCPO and other committees. This enquiry will also explain how costs seemed to double and triple as members had pointed out. Members should also forward these questions to the accounting officers of the offending institutions.

Mr Tshitangano discussed non-compliance and deviations. He made an analogy: if there are no traffic officers, people will drive at a speed of 200kms/hour. The lesson is: if there are no consequences, people will not change their behaviour. Problematic institutions and individuals had not changed their behaviour as only verbal warnings had been given and not strong punitive measures; this explained why deviations continued to be widespread. Law enforcement agencies and the Special Investigations Unit (SIU) have the power to law criminal charges. However, in many cases, the reports of the SIU were “gathering dust” and had not been acted upon. The SIU had investigated correctional services and soon the report would be released – hopefully the president will act and there will be consequences. A report without consequences was not useful. By example, a forensic audit was done by Treasury and released by 2014. This report was still gathering dust at the time of the meeting. The report was sent to “the Province” to take action, but no action was taken. Similarly, a Provincial executive committee filed a report implicating an accounting officer, but the committee cannot take action against the officer. The fundamental problem was that the investigating authorities could only recommend or implore people to comply - they did not have strong enough punitive measures at their disposal.

Mr Tshitangano discussed NT’s role in the IPP procurements. The role of NT was only in initiating IPP projects. The supplier will make a proposal and sometimes request exemption from certain preferential procurement regulations, which OCPO considered. Beyond that it was the role of ESKOM and DoE to sign-off on and manage these contracts. The disputes and questions that arose following media coverage since 2015 were between ESKOM and DOE to sort out and respond to.

Mr Tshitangano explained that OCPO could not report on all of its investigations as some were still dealing with sensitive/confidential material. OCPO monitors even within NT and OCPO therefore had “enemies” within NT. For example, the Deputy-General or the Accounting Officer [of NT] can have to report to OCPO. OCPO receives many allegations about procurement and it investigates these. Some investigations are sensitive and cannot be released before the reports have been authorized for release. Some cases did not “move” for a long time due to this.

Mr Tshitangano responded on the question of BBE. The empowerment project started a long time ago. A recurring problem was that previously disadvantaged individuals that received contracts would sell these contracts to others and keep the profit. Often the contracts were sold to well-established companies, such as Wells-Fargo for example. The Department of Trade and Industry (DTI) needs to intervene in areas with low capacity, to make sure that disadvantaged persons are empowered, and that goods and services are procured from local suppliers. He stated that some contracts were inherited by firms before the PFMA was enacted. Often contracts were often extended indefinitely; they were ongoing.

Mr Tshitangano discussed deviations. OCPO needed the support of Parliament. OCPO could decide not to condone a procurement plan but without the support of Parliament the measure is insufficient. Hopefully some of the issues raised, such as accrual of debt and deviations, would be covered in OCPO and other institutions’ reports. This would make it easier for institutions to monitor budgets and procurement plans.

Ms Setan responded to Ms Senokoanyane’s regarding travel. The technology would enable government to provide a single travel portal that would provide a Global Distribution System (GDS) linked to all travel suppliers. On the platform one can request an itinerary, with a budget limit built in that was set by NT. Budgets would still be decentralized and allocations could be done right down to the business unit level. The platform would serve as a provider or enabler for government travel.

Mr Human responded to Mr Gcwabaza. There were 789 foreign companies registered on the CSDB. National Departments had done business with 14 of these. These included IBM, Microsoft and CISCO. These contracts involved a significant amount of money. The problem with foreign companies was quite complex. Foreign companies have distribution channels. They often employ South African firms and distribute their products through them as sole distributors or selling agents. So, under this arrangement, some of the money goes to South African companies. However, the structure is problematic as distribution is not skilled work, little skills transfer occurred, and manufacturing remained overseas. He stated that the structure of the economy through state procurement was diluted by low productivity activity. There were 17 legal types registered on the CSDB. The most common types were pty limited, close corporations (ccs) and private or public companies.

Mr Human continued. He stated that to curb deviations, extensions and evergreen contracts, there were at least four considerations. Firstly, the Bill included a provision for fines, sanctions and debarments. These functions were not traditionally dealt with by OCPO, although it had done debarments before. OCPO wanted to extend its functions to be able to implement sanctions and fines against officials. AG had requested a strengthening of its powers from Parliament to deal with irregular expenditure. The second recommendation was that OCPO be allowed to perform quality tests to see whether goods and services procured met quality standards. The third recommendation was to reduce corruption with transparency measures. A real time reporting portal and an oversight portal, with real time data on tenders, contracts and pricing will provide transparency and reduce corruption. He added that it was too late to consider issues months after they had arisen. The fourth consideration was competition. He felt that it was crucial that policy serves to undermine the old companies that were dominating the procurement space. Providing multiple awards was one way to do achieve this. Under multiple awards work packages are contracted with several suppliers who all benefit from the large funding amounts.

Ms Motseto stated that the challenge to OCPO was that the majority of SCM practitioners did not have appropriate qualifications. As a result, OCPO frequently had to recruit people with insufficient knowledge of SCM. That had an impact on performance. Often procurement is done via competitive bid before a proper investigation of the market is done; when competitive procurement fails there is an emergency and deviation is requested. OCPO wanted to place appropriate SCM content in the learning curriculum to produce highly trained individuals who could perform this role.

Mr Human stated that an application was brought to the OCPO for reviewal of the IFMS procurement. Officers were currently engaged in reviewing that transaction. It would hopefully be concluded within three weeks.

Ms Motseto explained what the presentation meant by non-submission of procurement plans. The meaning was simple; if one does not plan, create a strategic document and an APP, and include these in a procurement plan, then you do not have a valid procurement plan to submit.  It is important that the procurement plan talks to an APP and a strategic plan so that market analysis is done and the “best way to buy” is found.

Ms Shope-Sithole asked Mr Tshitangano to make available the accrual reports per department. She stated that the Committee wanted to “follow the money”. She agreed with Mr Tshitangano that OCSLA should appear before the committee.

The Chairperson stated that OCSLA took six months to give input on the Bill. Why did this take so long?

Mr McLoughlin stated that by his understanding 2 704 state employees conducted business with the state over the previous business year. Have steps been taken to rectify this? It is obviously against the law. There are still 28 427 state employees registered on the CSDB as owners, directors and non-executive directors of suppliers. Are they being taken out of the system? Is there a plan to remove them? They are doing business with the state when it has been outlawed. 

Mr Maswanganyi was concerned about the autonomy of universities and how it related to the procurement system. Who do universities procure from? The Department of Health has given money for student accommodation, but he has heard that there was no money to finish student buildings. There have been strikes.  How do universities account, and to whom? These issues were very important for the student population. The processing of the Bill needs to be a priority of Parliament. He asked the Chairperson to please follow up on this, to make sure the legislation was processed this year are tabled timeously.

Ms Senokoanyane asked the OCPO what it and NT could do if individuals/organisations simply refused to comply with procedures and processes. What did or what could they do, and how could the situation be improved? She requested more explanation on the plan to consult users of the CSDB. She explained that some companies overcharge; the price a company charges is not a reliable indication of the quality of work. As such, assessing quality standards was relevant. Would user consultation be done before or after the [procured] work is complete? If the work is completely finished when the use consultation is performed the intervention may not achieve the purpose of getting value for money.

Mr Gcwabaza stated that a document was received by the Committee in March [2018] detailing deviations. The Committee needed to look at this document to establish what NT was proposing on this issue. OCPO and the Committee together should look more closely at the document and how it related to the Appropriations Bill. Parliament needs to be decisive and it needs to strengthen OCPO.  He asked that the Chairperson prioritise the examination of the document.

The Chairperson stated that budget cuts affect payments that are supposed to go to service providers. Service providers need to be paid. NT must brief OCPO and effect budget cuts only where there were no debts to service providers. Budget cuts should also not impact economic growth. Accrual can only be solved by payment – budget cuts will worsen the accrual problems. Whatever money is saved from budget cuts must be redirected to payment of accruals owed to service providers. When OCPO has more time it must educate the committee on Foreign Direct Investment. What is in the country’s best interest? How do we address income inequality? Are there regulations in place to make sure that FDI creates opportunities for South Africans? There is a worry in the committee that we are exporting wealth and providing opportunities, for example for China. This is important in dealing with South Africa’s unemployment situation.

Ms Shope-Sithole stated that her understanding was that FDI is different to foreign companies getting tenders as FDI has some longer-term basis. A foreign company applying for South African tenders has no long-term commitment.

The Chairperson repeated that it would be useful for OCPO to educate the committee on the matter in order to “broaden their understanding”.

Ms Motseto responded to Ms Senokoanyane. She explained what she meant by one person taking decisions. Ideally there are many users who are comparing prices so that, when they get quotations, they have some information and I can “sign off” on the most affordable option for a given product. But in certain institutions, only one person takes the decisions. This person can source the quotations and pick whichever they want without regard to the market price. If they prefer a supplier that overcharges for a service, they can just choose that supplier and appoint them. She added: “it is only when it comes back as a delivery back to me as the person who requested to buy that I see that this is not the price that I had in mind.” She proposed that the OCPO hold an induction session with the committee so that OCPO can share information and knowledge.

Ms Nxumalo responded to the Chairperson. The contract management framework would be completed by the end of the 2018/2019 financial year. The first phase of the “development of state owned construction contracts” project would be completed by the end of July. The OCPO works through provincial treasuries. The challenge with procurement plans was that the budget was usually done before procurement plans were drafted. The SCM units are only involved at a later stage which was a problem. SCM units should be involved during budgeting and the drafting of APPs. This would avoid the problem where the budget is R20 million, but then the appointment is for R40 million. This is how this problem originates. Secondly, these contracts are not properly signed. A signed letter is written and delivered to the appointed supplier, but no formal contract is signed. As a result, there is no management of the contract.

Ms Nxumalo stated that procurement is a lever that can be used to address social issues – there are preferential regulations.  The strategic sourcing unit of OCPO considers procurement in light of this agenda. The criteria of the bid can be designed in line with various priorities of government, including local procurement rules. As pointed out, in many cases companies are 100% black owned, yet the majority of the value is being imported from foreign companies, who use agencies to establish themselves in South Africa.

Mr Human responded to Mr McLaughlin. Steps were taken with the Departments of Public Service and Administration (DPSA), Cooperative Governance and Traditional Affairs (CoGTA) and Public Enterprises. The DPSA had issued a regulation that public servants may not do business with government. Public servants in national and provincial departments were given six months to resign as employees or as directors. There were under 1000 resignations. In the case where business was continued, the Chief Directorate for Ethics in DPSA started a process of inquiry. DPSA asked individuals why they continued to do business with government – where applicable, steps were taken.

Mr Human noted that sometimes there are instances where it makes sense for public officials to do business with state, for example, in the marking of exams or in medical activities. In this case, NT requires pre-approval from the executive authority. These approved cases are listed, and thus the matter is transparent. Finally, regulations for municipal employees doing business with the state were issued in mid-January [2018]. The DPSA and CoGTA were planning to make this effective as of 1 July 2018. A list of public servants doing business with government was being provided. The Bill will strengthen this by barring public servants from registering on the CSDB.

Mr Ntombemi stated that there is a type of FDI where foreign firms invest their plants in South Africa. In this way production is done in South Africa using South African labour. There were four plants manufacturing condoms that were financed by foreign companies. Many goods could be manufactured in this fashion. This is a better arrangement than simply importing and distributing finished goods. Another example was office “copier machines” [printers].

Mr Tshitangano provided closing comments. A problem is that regulations only cover public servants and not employees of public entities. These employees are not prevented from doing business with government. The OCPO had recently dealt with a case where a company was a preferred bidder. One of the directors of said company was also a director at Eskom. He submitted a letter to the OCPO saying Eskom granted him permission to do business. However, the letter was not credible and when OCPO contacted Eskom they said that permission was never granted. Employees in public companies and state-owned entities should be barred from doing business with the state.

Mr Tshitangano responded to Mr Maswanganyi. The OCPO had received allegations from institutions of higher-learning. If the buildings were not completed the OCPO would examine the issue. In these cases, often companies were underquoting to get tenders. When the tender is awarded, they then want to expand the contract. When institutions refuse, it transpires that funding is insufficient to complete the project. This was not only in the case of higher-learning but was a widespread problem. He noted that 90% of the appointment decision was based on price alone.

Mr Tshitangano stated that the submission date of procurement plans was 31 March each year. Those companies that did not submit plans were contacted by OCPO. If there is no response, Ministers could be contacted. The alignment of the APP and the procurement plan was a legal requirement. An organization looking for appropriation should provide these documents. Consistency in this regard would also deal with accrual problems.

Mr Tshitangano agreed that spending and strategic plans must be re-prioritised when budget cuts are implemented. Organisations must be pressurised to re-prioritise their spending towards achieving highlighted goals.

Mr Tshitangano commented that foreign firms consider incentives when deciding where to invest. He stated that OCPO deals with procurement. Before an institution engages with international suppliers, it is supposed to post the tender for local suppliers. If there is no appropriate supplier, as was recently the case when TRANSNET was unable to supply, the tender is then opened to international bidders. The local market is “tested” before the international market is consulted. Subcontracting conditions can also be imposed, so that subcontracting also meets preferential policy. He stated that this was why institutions needed to do demand management. He also noted that there can be a problem if a foreign supplier is awarded a contract with a subcontracting provision, but then later local firms cannot meet the needs of the supplier. In one case a supplier could not supply for two years because it lacked a capable local subcontractor. 

The Chairpersona noted that Members still had pressing questions, but that time was up. She asked them to put further questions in writing to the Committee Secretary, who would forward them to the OCPO.

The meeting was adjourned.

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