Integrated Financial Management System (IFMS): hearing with National Treasury

Meeting report

The Chairperson welcomed the National Treasury Director General and his team and noted the progress the Committee had made towards isolating and dealing with IFMS challenges. SCOPA’s concerns had been twofold, one being the forensic investigation after the failure of Deloitte and the second being the importance of IFMS for better management of funds, human resources and supply chain. However, SCOPA had sensed that the project had not been handled with the requisite level of focus, therefore the purpose of this meeting was to get a sense whether the project was exactly where it was supposed to be.

National Treasury briefing on Integrated Financial Management Systems (IFMS)
Mr Dondo Mogajane, Director General: National Treasury, highlighted the urgency given to the project as had been directed by SCOPA. National Treasury was eagerly awaiting the forensic report which would help it to focus on the right path to follow. The Auditor General audit report from 2017 also enabled Treasury to focus on critical matters in the IFMS project.

Ms Laura Mseme, National Treasury Chief Director: Strategic Planning, Monitoring and Evaluation, spoke about Treasury’s updated baseline plan, the approval of Phase 2A of the project plan, the completion of its change management strategy and the identification of pilot sites. Weaknesses in the IFMS had been addressed through the implementation of strategic and programme governance structures, while resource challenges had been addressed through the recruitment of a Chief Director for IFMS, which was in its final stages. Treasury had also brought in additional project management skills from State Information Technology Agency (SITA) while the capacity needed for change management had been on-boarded. To further address weaknesses in controls, internal audit verified invoices before payment; the Office of the Chief Procurement Officer (OCPO) was in charge of all procurement and IFMS was being monitored by its own risk committee and National Treasury’s Risk Committee.

Nexus Forensic Services had been appointed on 1 February 2018 to conduct the forensic investigation which would be finalised on 12 July 2018. The investigators had requested two extensions because they were experiencing delays in extracting information, given that some participants had left the public service or were on suspension. Treasury had however made it clear that no further extensions would be granted. Oracle had provided Treasury with a written undertaking to address matters raised in the audit report, which had been submitted to AGSA for a response. Treasury had extensive and constructive engagements with ICT-Works about previous work and all concerns will be addressed.

Progress had been made towards IFMS local procurement as Treasury had specified the involvement of local suppliers as system implementers, in its terms of reference with SITA. The intention is to utilise local companies for the implementation of the IFMS solution in the approximately 165 departments in the Public Service. A database of pre-approved Oracle certified implementation partners is to be established through an open procurement process which SITA will manage. These companies will range from large organisations with a national footprint to small provincially based organisations. Quotations will be obtained from the companies on the database for implementations in specific departments. Due to the size and scope of the IFMS Programme, this will promote skills development, job creation and growth in the local ICT industry.

The intellectual property inherent in the enterprise resource planning (ERP) software belongs to Oracle but any software developed for the South African Public Service as part of the implementation of the IFMS will belong to Government. Any data to be captured on the system will belong to the relevant Public Service department that captured the data

The project was currently in phase two of programme implementation. The procurement of service provider implementers would take longer than expected because Treasury wanted to include local suppliers. The assessment of the readiness of the pilot sites was currently taking place while three departments in the Eastern Cape and Western Cape had been identified as lead sites for the pilot rollout phase, which would start in September 2019 and end in April 2021. National rollout would then commence in February 2021. The data migration strategy was currently being drafted and the Centre of Excellence was being set up, which was important for the sustainability of IFMS 2. It ensured that the system remained innovative and under the ownership of government.

Treasury had negotiated rates of 17% less than the standard rate of 22% for support fees and 0% annual increase on renewal for the first four years. Oracle had also foregone the reinstatement fee which would have cost 150% of the net support fee.

Comparisons were made between what IFMS1 would have cost and what the revised IFMS 2 would cost (see document).

Discussion
Ms N Khunou (ANC) raised concern about the potential failure of IFMS 2 due to the use of SITA, which had problems of leadership, system maintenance and its role in the failure of IFMS 1. National Treasury should supervise SITA if Treasury wanted to ensure that the system was implemented. Could Treasury clarify the 98% discount for licences which meant that licences were almost free? There were suggestions from the Auditor General that Treasury was still looking into matters before it could kick start the project on 12 July which was not far to go. What exactly had Treasury not put in place and was IFMS 2 really going to work on 12 July?

Ms T Chiloane (ANC) asked when Treasury envisaged to have the project complete and running. How much was paid to Nexus Forensic Services? Could Treasury clarify what it meant by the 150% reinstatement fee of the net support fee, which it would have paid if Treasury had not purchased support with the licence?

Mr Dondo Mogajane, Director General, responded that Treasury had budgeted to pay Nexus Forensics R1.6 million and even though the request for extension had been made twice, it did not have an impact on the cost. It was important not to link the performance of the IFMS 2 project to the date of 12 July 2018 as that was the date set for the completion of the forensic investigation. The full project implementation of IFMS 2 would start in 2021 with the national rollout in April 2021. The project was currently at the pilot rollout phase and the Project Steering Committee was paying close attention to ensure deadlines were met.

Ms Laura Mseme replied about Oracle costing, saying Oracle was able to discount its licencing fee in exchange for long-term large contracts, which were used as a platform to transact business in the broader SADC region and the continent. Some companies even provided software for free on the basis that it was a large contract as in the case of National Treasury, and therefore the saving of 98% was correct. The letter from Oracle addressed audit findings from 2017 which broadly referred to the fact that National Treasury had purchased licences and support on licences, yet they were not fully utilised. What this meant was that if Treasury had not negotiated support at the time it was purchasing the licences, Treasury would have lost, and would have had to pay the re-instatement fee of 150% of the net support fee.

Mr Mogajane explained that Treasury used the Auditor General findings to inform what it reported on to SCOPA as well as its work on the project going forward. Treasury had received a finding for fruitless and wasteful expenditure on the licences that it had purchased but did not use, which prompted it to engage with Oracle to justify why it paid the fee of R394 million upfront. The Oracle justification for payment showed that Treasury had received a discount, which was then explained to the Auditor General, backed by documentation from Oracle. For the 98% discount, Treasury received the discount after negotiating with Oracle for a waiver brought about by the renewal of licences which required a R58 million payment. Failure to do so meant a re-instatement fee of 150% of the outstanding amount would have been paid. It was normal for IT licences and products to be given for free where value was derived from support, following the business model adopted by some IT companies.

Mr E Kekana (ANC) raised concern about capacity in National Treasury. SITA was going to provide project management but Treasury was busy appointing a Chief Director. How was Treasury going to manage control because the Director would be in National Treasury but another entity would be providing project management? Ownership and intellectual property was going to be a problem if Treasury did not have its own internal capacity as it was going to rely on SITA for project management. On the preparedness of other departments, had Treasury started a process of engaging departments about IFMS or when would that process begin?

Mr M Booi (ANC) asked the Director General how well he knew SITA. Had he ever engaged with SITA?

Mr Mogajane responded that he knew little about SITA.

Mr Booi expressed concern about SCOPA's experience with SITA. It did not find the use of SITA helpful for other departments, because it had caused many delays. If Treasury was going to give the project to SITA, he wondered how much of the project would be complete by 2030? Was Treasury confident of SITA and had it looked into SITA’s capacity which was presently not one to be proud of. How much had already been spent on SITA? If Treasury had chosen SITA to manage local companies, there was no guarantee that the project would be completed in time because SITA lacked the capacity that Treasury required. Auditor General reports revealed that there were no improvements in SITA. Was there capacity in the country for other companies to be empowered to ensure that Oracle was not the sole representative in the country? Could the DG look into SITA and give a reflection of his own view. It was good that Treasury had decided to test the project in the Eastern Cape because it had many challenges, but the Eastern Cape would not be where it was if SITA had capacity from the beginning.

Mr Mogajane understood the concerns raised by Members over SITA’s involvement in the project and its capacity. National Treasury would assess the risks and capabilities of individual partners that had the potential of bringing the project down, and address concerns through the Steering Committee, which comprised of National Treasury, SITA and the Department of Public Service and Administration (DPSA). Treasury’s focus on SITA as a Centre of Excellence may be misplaced based on how the Committee knew SITA, but Treasury needed time to understand the concerns raised and understand the challenges faced by SITA. Treasury would partner with the relevant department that oversaw SITA as well as other portfolio committees if there was a need. The SITA CEO would also be engaged about the concerns raised by Members.

Ms Mseme responded to the readiness of other departments, saying the engagement strategy was in the final drafting stages, which dealt with how Treasury would engage with other departments. Readiness tests would also be conducted in all institutions because the readiness of institutions defined the success of the project.

Mr Kekana clarified that he was asking about the appointment of a Treasury IFMS Chief Director while project management would be outsourced to SITA. Was Treasury building its own capacity? How was actual management going to happen? How did Treasury plan to control?

Ms Mseme explained that project management provided by SITA was only an additional skill because National Treasury had its own resources. Control therefore remained within National Treasury as SITA’s role was to support the project. IFMS as a discrete project also had to report to the risk committee and the Audit Committee , which further reinforced control.

Mr D Ross (DA) raised concern about the governance and control which was not clearly defined in 2005 when the project began. When the project started in 2005, the responsibility was squarely placed on SITA up until National Treasury began to play an auxiliary role. Only later, after SITA fell through the cracks, was when other partners tried to strengthen the project. A look into the cost of the project to see if it was properly defined in the founding stages, raised associated risks. The project had cost R1.7 billion to date and there was nothing to show for it. Treasury was taking the lead role in putting the project together, which was acknowledged by the Committee, but it was rather late. The project was initiated in accordance with the PFMA Act which spoke to the introduction of proper financial management systems at the national and provincial level, and it was therefore necessary for the Auditor General to provide information on the current status of financial management systems. There was nothing to show for the project and perhaps the process should be aborted, given that in terms of cost it was still open ended. The Committee, the DG and Auditor General should hold a meeting in camera to discuss the current status of the system and look at the opportunity cost of what was going to be spent in future. August 2015 saw the intervention by internal audit to assess the critical findings of the Auditor General. Who formed the Audit Committee  and could a detailed report be provided of the findings of that Audit Committee ? Could Treasury explain how the projected expenditure of R3.1 billion was revised down to R1.7 billion? The project was a mess in terms of cost and timelines. An assessment of its necessity and where it went wrong should be done, seeing that it was important for SCOPA to follow the money and find accountability.

Mr Mogajane replied that Treasury had spent R1.7 billion against a projected R4.2 billion and the R3.1 billion had not been scrapped. It was however important to inform South Africans that IFMS was a necessary project because of the benefits it would provide. The project was not a mess because it was going in the direction it should and therefore should not be aborted. There was nothing to show for the project as Treasury had already explained the project management challenges and delays in court processes, which had been dealt with. The whole system had been cleaned in terms of process and accountability. Treasury was at a point where it was moving in the right direction. An appeal was made to SCOPA not to focus on the idea of no value for money but rather to give guidance on correct measures as the project moved along.

Mr Ross clarified that the efforts of the current DG and Treasury were commendable but he was referring to the history of the project, which amounted to fiscal waste and huge expenditure. Instead of the rollout programme in the Eastern Cape and Western Cape, could Treasury instead roll out to a single dysfunctional department so it could see the success of the system, given that R1.7 billion had already been spent.

Mr Booi explained that SCOPA was trying to assist in building Treasury and therefore wanted to give honest and open feedback. On ownership of intellectual property, who in government was going to own this product given that there was National Treasury, Oracle, SITA and other small companies involved?

Ms Chiloane said SCOPA's frustration with the financial management across departments, necessitated the pressure that Treasury was now facing. The IFMS project was going to be rolled out in 2021 but it was in fact needed now because SCOPA wanted the mismanagement of funds to stop.

Ms Khunou raised concern about previous systems that had collapsed in departments which cost the government money. Had Treasury visibly seen the benefits of Oracle because it was expecting that IFMS would result in skills development, job creation and growth of the local IT industry? It did not make sense that Treasury was planning to have a Chief Director and then take the project management to a government entity that was dysfunctional, and expect the Chief Director to be accountable. If Treasury was serious about completing the project, especially when a lot of money had already been spent, it should reconsider working with SITA. Forensic investigation should also be conducted on SITA.

Mr Mogajane responded that Treasury was aware of challenges related to intellectual property and data belonging to the South African state. Treasury, in its rollout plan had factored in the development of the IT sector by identifying system implementers who were locally based to empower small players. It was true that implementation of the IFMS project should have long been completed and if Treasury could ensure an earlier completion date than April 2021, Treasury would settle on it. Once the IFMS forensic investigation was complete, Treasury would embark on consequence management if there was any evidence of wrongdoing.

The Chairperson understood that once the forensic audit report was out, SCOPA and Treasury should look at the findings and assess how Treasury should proceed. The Audit Committee  findings on the work of the Project Management Office (PMO) tarnished the standing of Treasury, as the lapses reported were quite shocking. In the next IFMS engagement with Treasury, DPSA and SITA should be present as well as the Treasury risk committee because of the risks associated with SITA. IFMS was indeed going to address a lot of SCOPA’s concerns about financial management and supply chain, and the process of appointing the Chief Director should be finalised because this absence of leadership created challenges. It was important for Treasury to hire the right people and think through the process of hiring critically, because IFMS implementation had previously not gone well. How many other people did Treasury have in the IFMS unit considering that it was a critical project?

The Chairperson said it seemed as if the DG was in the process of panel beating the IFMS project into shape, which left one to wonder what was happening all along. Was a business case for IFMS done in 2013 or in 2005? For invoices going through Internal Audit, were they related to IFMS only and where did the critical role of the Audit Committee sit? On the Centre of Excellence, had Treasury looked into alignment between the current Centre of Excellence and the one that was going to be constructed to ensure proper integration? Could a report be sent on the same? Treasury should have provided more information on ICT works because of the challenges and issues previously raised. How much had been paid to ICT-Works from May 2017, what work had it done and were its invoices authenticated? From the presentation, it looked like Treasury had to convince ICT works to do work because there was no Service Level Agreement in place that would form the basis of dismissing them. The idea of black women could be a ruse used to front for powerful interest because it did not make sense that Treasury would still work with a company that did not deliver. How did Treasury arrive at the pilot programme being rolled out in the Eastern Cape and Western Cape? The totals on budgets, expenditure and surplus also did not add up.

Mr Mogajane agreed to other department being present in future meetings so that they could jointly answer to SCOPA. He took accountability and responsibility for what happened prior to the project even though he took over the project at a later stage. The Audit Committee  was brought in to check IFMS payments with a focus on cleaning and streamlining the process of procurement and finance, so that payments were based on invoices that were valid and budgeted for. National Treasury had four people in IFMS Unit who interfaced with the project management office, the steering committee and the whole process, which was currently adequate. Treasury took note of SCOPA’s advice of hiring the right person with the right capabilities as Chief Director, which appeared to have taken long. The IFMS Unit was indeed an enabler in addressing financial management. A business case was done in 2013 because Cabinet would not have signed without a business case. Treasury needed to be guarded just like it guarded other departments and even though it may not be optimal in its structure or how it was rolling out the project, it was working towards strengthening its Project Management Office. Treasury would re-look at the calculations to ensure that it had not misrepresented this to SCOPA. The issue of value for money could only be determined once the project was rolled out. The Eastern Cape and Western Cape were used to represent worst case and best case scenarios, because they represented both rural and urban environments. IFMS was going to be rolled out in three departments including the Department of Health which would further test the Human Resources module and provide information on reporting.

Ms Mseme confirmed that a report on payments made to ICT-Works would be submitted, together with a report on the current Centre of Excellence and the one envisaged. A decision matrix for selecting Eastern Cape and Western Cape would also be provided.

Mr Mogajane appealed to SCOPA to call Treasury back with ICT-Works so that it could be given an opportunity to reply, because ICT-Works felt that it was unfairly dealt with in the last engagement. There were legal arrangements surrounding the transition from IFMS 1 to IFMS 2 and the Auditor General had a problem with the amount of money that was paid to ICT-Works.

The Chairperson stated that the Committee would not call ICT-Works because National Treasury had contracted ICT-Works and therefore had the responsibility to report to Parliament. It did not make sense that ICT-Works still worked with Treasury when it did not deliver. Could Treasury provide information on the work ICT-Works did, its invoices and the agreements reached between Treasury and ICT-Works. Had Treasury checked for alignment of the old and new centres of excellence and could a report on this be provided? The 2013 business case should also be sent to the Committee.

Mr Mogajane agreed to provide a response in writing on the alignment of centres of excellence and for all the information requested.

The Chairperson informed Members that SITA would not meet with SCOPA the next day because it was not ready to provide the information that had been requested. SCOPA would instead meet the Department of Water and Sanitation.

The meeting was adjourned.