SARS deviations & expansions: hearing

Meeting report

The Chairperson said that the Committee was concerned about the prevalence of the practice of expansions and deviations. The worry was that it might end up normalizing what was supposed to be used only in exceptional circumstances. The Committee had asked National Treasury to provide quarterly bulletins on this. In some government bodies, the figures were going through the roof. This is the why SARS is appearing to explain if what SARS had done was necessary and not an abuse of the system.

SARS deviations & expansions: hearing
Mr V Smith (ANC) said that SARS had asked for a deviation from normal bidding related to the Eskom Academy of Learning. In its letter to SARS, Treasury did not support the request for that deviation and advised SARS to test the market. He asked SARS what was currently happening with this.

Mr Johnstone Makhubu, SARS Acting CFO ‎& Group Executive: Procurement, said that there was an initial phase where SARS went through a transaction that Treasury had approved. The understanding was that SARS would then go through a phase two extension. The deviation not supported by Treasury was for phase two. Treasury did not allow SARS to proceed with phase two and advised that SARS should test the market. The team was currently preparing to see how the market can be tested. SARS had opted to go to Eskom based on the Government Immovable Asset Management Act (GIAMA) as well as the fact that Eskom is a state-owned entity and it appeared to have the capacity at the time, to be able to accommodate SARS as well as their own requirements. When Treasury asked SARS to test the market, SARS did not go ahead with the transaction with Eskom. SARS currently has employees allocated to the Eskom Academy of Learning because of the phase one transaction.

Mr Smith said that SARS had senior managers and executive managers that it wanted to capacitate by sending them to the London Business School (LBS) and other such schools. He asked why SARS thought that Harvard or one of those schools were the only ones that could teach their CEO level staff. He struggled to understand that there is no South African institution that can teach MBA type of skills. If one wanted to improve oneself, one could apply in one’s own capacity and then ask the institution to refund them. He asked SARS to explain why it was necessary for them to pay upfront. Why is SARS paying exorbitant amounts of money without any tender?

Mr Makhubu responded that SARS did not go through with the transaction. The decision SARS had made was to undertake development of resources by having customized training that will bring the tax training element into the development of leadership. There was one for operational, senior, executive managers and one for EXCO as well as one specifically for women within the organization. SARS wanted to customize the training intervention to be able to bring organization specific elements. For the other institutions that SARS went out on tender, the institutions could customize 70% of the program that they already had by filtering in some elements SARS wanted people to be trained on.

The employees at SARS have a study aid programme that they are free to go on. Without it, it was imposed as capacitating in a manner that is in line with SARS’ strategic outcomes. Some of the employees have external MBAs, but SARS wanted programmes that, at different entrance levels, addressed some of the challenges in the organization. By customizing the programmes, there would be relevant case studies that employees are given to work through, so they are able to bring solutions.

Mr Smith acknowledged that SARS did not go through with the transaction. However, he wondered how SARS had resolved the problem given that SARS had requested the money. What has SARS done now that its employees have not gone to LBS and Harvard? Has the problem disappeared?

Mr Makhubu replied that the problem has not disappeared. The beneficiaries of the programme would have been lower level management, middle and senior executives. SARS has decided to put this on ice for now while it finds ways of addressing the problem.

Normally the challenge with this specific type of transaction for development, is that the relevant entities do not respond to tenders. SARS has not gone on with it but it was looking, from a procurement point of view, for a strategy method to utilise. The critical mass of staff are taken through training via the providers that SARS obtained through open tender. For the lower management, middle and senior management, SARS went out on an open tender for those programmes and people are currently being trained.

Mr Smith said that SARS went to Treasury to ask for a three-month extension of the Vodacom contrac involving an amount of R19 million for three months, from 1 July to 7 September. SARS’ rationale was that, Vodacom had been doing it in the past, so it was proper to give it to them. He asked why they needed a deviation for the Vodacom transaction. R19 million for three months is about R8 million a month. Who are the beneficiaries of this R8 million a month at SARS? He asked for an update on what was currently happening given that the three months had expired. Who is currently providing that service?

Mr Makhubu replied that SARS was waiting for the RT15 [the mobile communications tender government is contracting for government employees]. SARS did not want to expand as they were instructed not to renew until the RT15 was closed. The contract was therefore extended for only three months to ensure that when the RT15 was closed, SARS would then participate through that transversal contract. SARS had now moved into the Treasury transversal contract with Vodacom and was two months into that contract. SARS had seen around a 40% cost reduction, since it got into the RT15 arrangement.

He explained that whenever SARS goes to Treasury for deviations, the value asked for is normally based on an estimate. The R19 million was an estimate. When SARS executes the contract, it is not executed at R19 million.

Mr Smith said that SARS asked for R57 million for 10 years for a building lease in Vereeniging. This practice of extending tenure was becoming a trend across all SARS buildings. He wondered if SARS was ever going to leave the place. Does it mean that for next 100 years, SARS is going to lease buildings? He said it needed to find a solution to this problem.

Mr Makhubu agreed that SARS should look at some way of shifting. SARS had Exco approve corporate real estate, which supports the move from leased to owned in some instances if financials do allow.

He acknowledged that SARS had seen this trend, and it was in some instances concerned. For Vereeniging, SARS did market intelligence analysis to see if any planned development would be coming to that area. However, under the current environment SARS only has R2.7 billion to spend. SARS is not able to commit to building branches. SARS has and engagement with the Department of Public Works to come up with ways and means to collaborate on leases. Doing that will bring more transparency to the process and ensure more collaboration. It is a challenge in some environments because to find the space is quite a challenge. He assured the Committee that SARS has tools such as the Rode's Report on the South African Property Market that can be utilised when engaging a service provider, whether a new transaction or an expansion. SARS checks to ensure there is value for money in terms of compatible rates.

Mr Smith asked SARS to explain the Multi Choice contract where SARS was asking for DSTV commercial premium subscriptions. What is this DSTV Subscriptions? SARS stated that the reason for not inviting competitive bids was because Multi Choice holds a competitive advantage within the subscription broadcasting market. He argued that the logic of not requesting a competitive bid as someone in the market holds the competitive advantage would not lead to the breaking monopolies in the country. He asked SARS if it agreed with him and also to explain what the service was.

Mr Makhubu apologised for the way in which it was framed. His team framed it incorrectly. SARS cannot utilize competitive advantage as a means for deviating and expanding. It probably should have stated that it falls within the impractical part of the provisions.

The Chairperson said impracticality would apply because the term competitive advantage means there are other role players in the market, but that one was streets ahead of the rest.

Mr Makhubu explained the subscription service was to a business bouquet for the various SARS branches as well as some of the corporate offices. It allows you to flight material whilst people are in queues and allows the communications team to track what is happening in the news environment locally and globally.

He explained that when he came to the organization, he wanted to consolidate. There were many of these different individual transactions happening all over. He decided to approach the service provider and propose to consolidate them into one, create visibility and then later decide on lessening who got what. It was the first step towards creating visibility. SARS was now identifying people that should not be having the service with the intention of terminating it with time. Some people are not subscribers anymore.

Mr Smith asked for clarity on what the target market was. If the target market is South Africa broadly, then going for a pay-TV station instead of SABC did not make much sense. DSTV is not the best place to reach South Africans, especially poor South Africans. However, if the target market was the people in the office, then it would be a different story.

Mr Hlengani Mathebula, SARS Acting Chief Officer: Enforcement, explained that firstly there was an attempt at consolidating. Almost every executive or would utilize budget for a subscription of some sort. This created disparity in the organization because, one would have a business premium package and another would have a very different package. The solution was to stop and consolidate it into one package, and then individuals would have to explain why that package did not address their needs. Secondly, the audience would simply be the various SARS offices, which includes the branches and the head office. The third element was that there was going to be the ability to broadcast a message to the staff instead of having to dispatch teams to travel across the country which resulted in different time lapses for when staff received the message. The fourth element was the messages to taxpayers that SARS wanted to educate them on about SARS.

Mr C Ross (DA) was concerned about retaining skills in SARS. When people do obtain Harvard Business or London Business School qualifications, what are the chances of retaining their skills for years to come?

Mr Ross referred to the SARS collaboration with Public Works on leasing versus ownership. There should be a thorough analysis of lease cost with competitive bidding. Ownership is expensive - it could be triple the cost of leasing. Currently, many state-owned entities are not paying their dues to municipalities, and this seems to be a problem. They do not supply services; their building is dilapidated and it is a huge cost to maintain. He preferred the lease option but asked SARS to provide their views in terms of cost analysis.

Mr Mark Kingon, Acting SARS Commissioner, responded that ownership versus lease had been an ongoing challenge about knowing what is best. SARS has been doing evaluations on corporate real estate specifically with the head office environment. There is a turning point where ownership becomes more effective and the payback over a five-year period becomes more beneficial. However, the buildings must be maintained and SARS understands the challenges arising from that.

Mr Kingon replied that SARS contractually binds people who they send on courses. They are bound and when they terminate early, there is a payback clause for the cost involved. SARS binds people when it invests into their lives, but it is never indefinite.

Ms N Khunou (ANC) noted that SARS indicated earlier that it had a study aid for its employees. She asked how much was budgeted for that.

Mr T Brauteseth (DA) noted the R617.7 million IBM contract. SARS asked for an expansion of R494 million, which is quite a large expansion. Treasury had turned it down and asked SARS to go to market. He asked for progress on the matter.

Mr Makhubu replied that at the time, Treasury had issued circular number 10/2017 on all ICT OEMs. However, circular number 3/2018 stated if SARS wanted to buy products with these service providers, SARS should go through SITA so SARS then went through that process. That was the agreement that was set between SITA and Treasury. That is the latest.

Mr Brauteseth asked if SARS was confident that SITA knew what it was doing because this Committee was having problems with SITA now.

Mr Makhubu replied that SARS already had pricing arrangements with IBM for similar equipment. SARS compared the prices to see if it was getting value. He confirmed that in comparison there was quite a discount on the same equipment. The Treasury-SITA framework agreement with IBM did add value.

Mr Brauteseth said that the vehicles SARS uses were valued at R200 million. SARS asked for an increase of R75 million. Why did they want the increase? Why did they not test the market before Treasury told them to?

Mr Makhubu replied that when he came to SARS, there was a service provider providing that service. SARS went out on open tender and the incumbent came through that process. He then decided to ensure that all costs including incidental costs attached to the SARS fleet are included in this transaction. So that amount is not the amount that goes to the service provider. In the R200 million, for instance, there are fuel costs, fines, insurance claims etc. There are a lot of things that the service provider has nothing to do with. For transparency reasons he wanted everybody to have a sense of what will diminish from this service provider from a cost point of view. Those pass-through costs were not included. He wanted to ensure that the contract was fully reflective of all the costs for purposes of pass through costs incurred elsewhere. The service provider was not going to get the R75 million, it was the other costs such as maintenance of fleets, that had been excluded from the contract. He wanted to ensure that when the contract is audited in its fullness, all costs incurred by the fleet are there. So it involved taking maintenance costs that were sitting elsewhere and putting them under the contract. If there is a vehicle to be maintained, it is a pass-through cost through the various network of centres that maintained the vehicle.

Mr Brauteseth referred to the appointment of SARS national bargaining chairperson as there was an expansion of R542 000. He asked SARS to explain that.

Mr Makhubu replied that SARS had a bit of a challenge. The national bargaining forum needs to be chaired by an independent chair. The national bargaining forum constitution makes provision for organized labour to nominate a chair. It was difficult for SARS to take this on open tender because of that provision. Going on open tender could get somebody that parties are not comfortable with. That was the reason SARS went to Treasury to say that it was in a dilemma. It is going to be a procurement transaction and SARS believed that it qualifies for deviation or to expand the arrangement with the previous appointee, Ilanga. Treasury turned SARS down. SARS went out on open tender and the process has been concluded. SARS will deal with organized labour in terms of the outcomes of that process.

The Chairperson asked how SARS had acquired the services of Ilanga.

Mr Makhubu responded that it was before he joined SARS but he noted that it was acquired through a deviation process at that time.

Mr Brauteseth asked for an update on what the progress was on this. He asked if somebody was in place now. The original contract with Ilanga was from March 2014 to 20 February 2017. How was SARS bridging the gap?

Mr Makhubu replied that SARS went for a three or four month request for quotations (RFQ) process. That is how the gap was bridged.

Mr Brauteseth referred to the executive search service and noted that Treasury had advised SARS to go through a competitive bidding process. Why did they not do that? SARS had a contract with someone for R15 million. The Treasury letter states the current contract is for four years (March 2014 to February 2018) for R15 392 726. The understanding was that, if they provide you with a successful candidate, they charge you for that service. He asked if SARS had a set service with these companies.

Mr Makhubu replied that SARS had a panel of service providers, they went out on tender looking for an executive search service. SARS limited it to executive search, because the organization was going through an operating model change. So there were going to be executive positions created and a need to recruit, first internally and if not, to go external. But only for the class of employees that are executive. For grade 7, which is middle management, and lower, SARS had set up a process to recruit internally. SARS set out a panel. The panel is on an as-and-when-required basis. It was setting up a vehicle so that at any given time, when it required resources, it could be able to tap into that procurement vehicle.

What would have happened is that the market would have bid, there would have been a rate, they would charge whatever percentage and those that were competitive enough would have gone through and formed that panel. They would specialize in different type of services such as executive head hunters for tax-related products. It was a panel. It was not to say that R15 million was money that was guaranteed to be spent. It was to create a vehicle.

Mr Brauteseth said that SARS referred to a contract value of 15 million and yet they were saying that people are used on an ad hoc as-and-when-needed basis. The expansion SARS requested is R4.1 million. That should be making provision for something in the budget, not procuring a service. When you procure a service, you are signing a contract. He asked for further explanation. The specific reference here was a contract for a specific period for R 15.3 million, that does not sound like ad hoc as-and-when-needed.

Mr Makhubu explained that how it normally work is that over that period, money would be loaded onto that contract on an as-and-when-required basis. When that contract was coming to an end, the value of that contract would have been exhausted. There would have been recruitment initiatives necessitating that value be loaded on that contract to be able to continue to recruit. The contract came to the end of that value. SARS went to Treasury to ask for R4 million to add on top of that value, which was not supported. SARS then went then out on a tender process.

Mr Brauteseth asked SARS to provide the Committee with some background to the open text contract.

Mr Makhubu explained that the open text contract is an ICT contract that SARS uses to character-recognize scanned documents that are scanned through the eFiling environment. It is able to recognize certain characters and allocate them into specific fields.

Mr Brauteseth asked why the system had come to an end and is not functional and needs replacement.

Mr Makhubu replied that the fact that the software has gone out of maintenance and support, does not mean you cannot continue using it. When it states end of life, it does not mean that in that instance that product cannot continue to be used. SARS would therefore ask its IT colleagues to evaluate where the life cycle of the product fits in terms of the software and architecture strategy of the organization. SARS normally tries to sit at N2, from the latest we try to be 2 below. If the last was Windows 10, SARS would try to be at Windows 8. SARS does not always keep up with the latest as it is costly. That is the decision it has taken.

SARS was therefore continuing with that version at the risk that if it needed support and it was not supported, it will have to find a way of dealing with it because it will be a challenge to SARS not to able to have the feeling and the document management systems being supported. SARS was continuing, at that risk.

Mr Brauteseth asked if SARS meant that it was sitting with a system that should it fail, eFiling will crash because that would be a dire situation. He asked what SARS had been doing since October.

Mr Makhubu replied that the service provider had said that it did not support. However, that does not mean that SARS did not have internal resources within its IT team to be able to work through that. However, it will be a matter of taking resources from other projects and allocating them to this. The risk is moderate and would be raised as high as the other risks in terms of system collapse.

Mr Brauteseth said that the Tourvest travel management services expansion was not supported by Treasury. He asked SARS to explain.

Mr Makhubu explained that this transaction was for outsourced travel management. Tourvest is a travel agency that manages all travel within SARS. SARS had contracted Tourvest. SARS had wanted to expand because it had a three-year contract with an option to extend for another two years. SARS asked Treasury if extending for another two years would fall within a variation or an expansion. Treasury responded that it was an expansion and it did not support the expansion for two years.

Ms T Chiloane (ANC) noted that SARS had talked about pass through costs and had mentioned traffic fines. She asked if SARS paid the traffic fines for its officials.

Ms Chiloane said that SARS is a highly specialized institution. She had a problem with outsourcing for recruitment. It makes it look like South Africa does not have people. South Africa has many graduates what are unemployed. The fact that SARS had to go out for tender for a company to look for an executive, did not seem proper. As an institution SARS can find ways to use your internal members.

SARS can always have to have programmes like internships to help alleviate the issue of unemployment which is hugely affecting the South African population.

Ms N Khunou (ANC) inquired about the DSTV subscription. How long the DSTV thing of giving information was going to be.

Ms Khunou asked who was responsible for SARS contract management. If they had a contract manager they would know that a certain contract is going to end long before. If SARS waits until a month or two before a contract expires, that is not a fair practice. Tourvest was not the only travel agent. SARS would not have these problems if there was a contract manager.

Ms Khunou appealed to Treasury and said that if it is negligence and somebody is not doing what they should be doing, Treasury should not approve these deviations or expansions.

Ms Khunou said that they must buy a car with a maintenance plan. It should be part of the contract. The maintenance should come with the price of the car. SARS did not plan properly. If it had planned properly maintenance and other costs should have been part of the initial planning of the contract.

Mr Kingon replied that SARS did recover the traffic fines but there is a process that must be followed to recover those.

Mr Kingon assured the Committee that for its executive searches, SARS goes through an internal process first. Most people that end up being employed are either through internal or those applying through the normal process. In terms of specialist skills, SARS is in direct competition with the broader financial sector. These people are highly sought after, some of the SARS specialists even get head hunted from abroad. SARS must go through specialist head hunting services to try and get some of these skills on board and that process is ongoing. SARS has a significant graduate programme and it has developed many of these skills internally in the different divisions. The programme is working and SARS is trying to bring a lot of graduates into the system.

Mr Kingon replied about vehicles maintenance costs, saying the vehicles do come with a maintenance agreement. For many of the vehicles, the maintenance agreement has expired and SARS then has to carry that cost.

Mr Makhubu explained that for vehicles, the maintenance plan is mostly for two years. However, most of the vehicles at SARS are depreciated over a period longer than two years. The difference between when the vehicle is written off completely in the books, usually after 10 years, and when the maintenance contract expires is eight years. It means that SAR has to maintain the vehicle for eight years.

Mr Makhubu replied about planning, that some of the contract expansions SARS was doing, were not for contracts expiring tomorrow or next month or in six months’ time. You will find contracts that are expiring in November 2018 but SARS has already gone to Treasury in 2017. SARS is trying to ensure that the planning happens much earlier.

Mr Makhubu responded that the travel management contract had a clause which enabled one to extend for another 24 months so it was not necessarily due to a lack of planning. SARS, over the past nine years, has every three years changed travel management service providers through an open tender process. SARS has given the market a fair chance and has demonstrated that every three years it goes out on open tender and gets, in most instances, new service providers.

Mr Makhubu assured the Committee that SARS looks at contracts. It has a contract management approach that enables it to preempt the expiry of contracts in future, and it will continue to improve it.

The meeting was adjourned.