SIU investigations: progress report; Department of Water and Sanitation challenges: Treasury briefing, with DWS Minister

Public Accounts (SCOPA)

27 November 2018
Chairperson: Mr T Godi (APC)
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Meeting Summary

The Special Investigating Unit (SIU) briefed the Standing Committee on Public Accounts (SCOPA) on the status of investigations as it related to the Department of Water and Sanitation (DWS). The Minister of Water and Sanitation was in attendance.

SIU’s observations on the current state of service delivery in Vuwani are that there is no water going through the pipeline and the communities are still not getting the benefit. The 3km part of the pipeline that was damaged has not been repaired. There are parts of the lining inside the pipe that are loose and must be repaired. This has been confirmed by the project managers, Bigen Africa and the Department did not have funds to pay Ascul or Bigen.

Investigations revealed serious maladministration and malpractice. The Department’s supervising engineer (Bigen Africa) duly alerted the Department timeously to the risks involved and they cannot be held accountable for the officials’ refusal to heed to their advice. The officials concerned, for example cited the promotion of BEE as justification to irregularly split the tender and thereupon extend the contractor’s contract despite Bigen’s advices to the contrary. This official was in the process of being disciplined. Investigations also revealed failure to comply with public service management and its regulations with regard to supply chain management; failure to heed professional engineering advice; poor project management; poor project management oversight by the Department; poor financial management; and poor records keeping.

On general procurement findings, the SIU found evidence during the course of the investigation that indicated fruitless and wasteful expenditure; irregular expenditure; fraud and theft; and corruption. The evidence also showed officials who appear to have defrauded the Department by being complicit in the manipulation of procurement processes concerned to their personal benefit and a contravention of section 17(1) of the Prevention and Combating of Corrupt Activities.

The SIU investigation on Vuwani has been completed. The contract was awarded in 2012 with a value of over R50 million with a construction completion period of 45 weeks. A total of R29 million has been paid to Ascul to date. Subsequent to the award of the contract, Ascul Construction, as from 6 July 2012 onwards, failed to perform on time. Instead of enforcing the penalty clauses, the Department allegedly unlawfully entered into a supplementary agreement which made provision for the waiving of the penalties. On 9 February 2016, the SIU advised the Director-General of the Department, not to proceed with the payment of R8.5 million to Ascul Construction. The Director-General accepted the SIU’s recommendation and instructed the two DWS CFOs that not to approve payment to Ascul Construction. The SIU further advised the Department that the R13.2 million paid to Ascul Construction under the premises of it being an “advance payment” was irregular as well as fruitless and wasteful expenditure.

The SIU provided the Committee with the outcomes achieved since the last presentation and said it has instituted civil action by way of a claim for damages to the value of R140 million, which was amended to R95.6 million and the particulars of claim were amended following an exception that was raised. The summons was issued on 6 February 2018 in the name of the SIU as the plaintiff against Ascul Construction, Dan Lucas Sikhosana (Director of Ascul), Zandile Yvonne Mathe nee Makhathini (DDG at DWS) and Mpho Joseph Mofokeng. The status of the civil litigation is that all three of the defendants have pleaded and a notice has now been served for amended pleas to be filed to accord with the amended particulars of claim.

On Lepelle Northern Water, the SIU Investigations revealed serious maladministration and malpractice and its observations on the current state of service delivery in Giyani showed there is currently no water connection and the company that was responsible for the Geotech services and managing the drilling of the boreholes indicated that the normal price for installing boreholes similar to the ones installed in Giyani was around R100 000.

On new investigations, the SIU has been instructed by the President to conduct an investigation into the purchasing of SAP Licences for more than R500 million; and the payment of R35 million in kickbacks. The proclamation was published on 21 September 2018 and the SIU team commenced work on 21 September 2018 and has already uplifted computers and documentation from the Department.

The SIU has found evidence thus far that indicated that the contract value was approximately R950 million consisting of R450 million for the licences plus maintenance over 5 years. There was no needs analysis conducted and there was no budget for the purchase of the SAP licences. No virement or approval of the payments was made to SAP and a total of R285 million was paid to SAP thus far. The State Technology Information Agency (SITA) was not consulted as was required for such purchases, and in fact SITA advised the DWS against proceeding with this contract. The SIU’s timeframes for the completion of this investigation was to initiate civil litigation in the first quarter of 2019 and the Interim Presidential Report completed by 31 March 2019.

Members asked about the cases that cited ‘insufficient evidence’ and asked for a timeframe the SIU had for conclusion of these matters. Members asked for clarity on the unnamed implicated officials, the costs incurred by the SIU due to the pushback by officials and what could be done to track and prohibit implicated officials from simply resigning and moving to another government department or entity.

Members referred to the advance payment in Vuwani and said it was blatant fraud because of the implicated persons' connections to Eskom. The recommendation made by the SIU saved R8.5 million, but R29 million had already been paid. The Committee asked about legal instruments that can be used. The Public Audit Amendment Bill provided for attachment of liabilities in the form of a letter of debt that will be served on the accounting authority and Members wanted to know how this could possibly assist the SIU. In addition, the Committee asked if the SIU came across irregularities as a result of directives or an improper implementation of directives by the executive.

National Treasury gave a briefing on the financial status on DWS and the Water Trading Entity. Treasury, summarised the audited outcomes for 2017/18 and 2016/17; budget management; major virements; payables and accruals; irregular expenditure; and the 2018/19 second quarter expenditure for DWS. In additon she covered the audited outcomes for 2017/18; financial liabilities to the Trans-Caledon Tunnel Authority (TCTA); the debtors age analysis; and Paymaster general account balances for the WTE.

The Committee was in agreement that this assisted in contextualising some of these matters. The Committee said the 'War on Leaks' was a continuous programme, but it was not properly placed and therefore not properly budgeted for - the expenditure was taken from administration. The Department should be able to explain how this came about, as well as on compensation of employees. It was a sly strategy to complain about capacity, but not employing people, but then using that money for other things.

The discussion focused on virements and noted bucket eradication did not have a budget. Buckets were supposed to have been eradicated and it was one of the areas the Committee may have to look at.  The Committee also wanted to know about the debtors age analysis and wanted comment on write-offs or applications for write-offs from the Department. Members also wanted clarity on unbudgeted deliverables which was not addressed.

Meeting report

Status of SIU’s investigations relating to the Department of Water and Sanitation

Adv Andy Mothibi, Head, SIU, said the SIU previously presented to a joint sitting of SCOPA and the Portfolio Committee on Water and Sanitation on 27 March 2018. This presentation focuses on progress made since the previous engagement. The proclamations discussed in the presentation are:

-Proclamation No R35 of 2008: Allegations at the Mhlathuze Water Board

-Proclamation No R54 of 2012: Various allegations at the Department of Water Affairs

-Proclamation No R22 of 2016: The awarding of contracts to LTE Consulting by the Lepelle Northern Water and Gauteng Department of Human Settlements

-Proclamation No R27 of 2018: The awarding of a contract by the DWS to SAP (SA)

On investigation outcomes he said, Proclamation No R54 of 2012 (Department of Water Affairs) was published on 21 September 2012. The SIU conducted the investigation into approximately 34 allegations all of which were completed with significant and successful outcomes. The Presidential Report on the outcomes was presented to the Presidency on 15 December 2016.  Prior to the finalisation of the Presidential Report new allegations were received by the SIU relating to the procurement process of the Vuwani Steel Pipeline, which the SIU commenced investigating in late 2014 under the same proclamation. The SIU presented the Final Presidential Report to the President on this matter on 28 October 2018.

SIU’s observations on current state of service delivery in Vuwani are that there is no water going through the pipeline and the communities are still not getting the benefit. The 3km part of the pipeline that is damaged has not been repaired. There are parts of the lining inside the pipe that are loose and must be repaired. This has been confirmed by the project managers, Bigen Africa and the Department did not have funds to pay Ascul or Bigen

Investigations revealed serious maladministration and malpractice. The Department’s supervising engineer (Bigen Africa) duly alerted the Department timeously to the risks involved and they cannot be held accountable for the officials’ refusal to heed to their advice. The officials concerned, for example cited the promotion of BEE as justification to irregularly split the tender and thereupon extend the contractor’s contract despite Bigen’s advices to the contrary. This official is in the process of being disciplined.

Investigations also revealed failure to comply with public service management and its regulations with regard to supply chain management; failure to heed professional engineering advice; poor project management; poor project management oversight by the Department; poor financial management; and poor records keeping.

Adv Mothibi gave a summary of referrals and on general procurement findings, the SIU found evidence during the course of the investigation that indicated fruitless and wasteful expenditure; irregular expenditure; fraud and theft; and corruption. The evidence also showed officials who appear to have defrauded the Department by being complicit in the manipulation of procurement processes concerned to their personal benefit and a contravention of section 17(1) of the Prevention and Combating of Corrupt Activities.

He gave an overview of the disciplinary referrals and said the SIU has written to the Acting Director-General requesting the reasons for the delay in the implementation of the SIU’s recommendations to discipline the officials, which in some instances was in excess of 4 years. A concern has also been raised as to the disciplinary matters that have been closed where there were representations made by the officials and without consulting the SIU regarding evidence to rebut those representations. The SIU has also written to the Director-General of the Department of Public Service and Administration (DPSA) to inquire whether the officials that have resigned have taken up employment in another government department. In terms of section 16B of the Public Service Act, the Accounting Authority may refer the disciplinary evidence to the officials new Accounting Authority to take action against the official. The SIU will facilitate and monitor the execution of this provision. 

The SIU investigation on Vuwani has been completed. The contract was awarded in 2012 with a value of over R50 million with a construction completion period of 45 weeks. A total of R29 million has been paid to Ascul to date. Subsequent to the award of the contract, Ascul Construction, as from 6 July 2012 onwards, failed to perform on time. Instead of enforcing the penalty clauses, the Department allegedly unlawfully entered into a supplementary agreement which made provision for the waiving of the penalties. The agreement also provided for a R16 million advance payment to Ascul Construction with a view to improve its cash flow. The extension is alleged to constitute a complete disregard of and/or contravention of the provisions of the original contract and the PFMA.

On 9 February 2016, the SIU advised the Director-General of the Department, not to proceed with the payment of R8.5 million to Ascul Construction. The Director-General accepted the SIU’s recommendation and instructed the two DWS CFOs that not to approve payment to Ascul Construction. The SIU further advised the Department that the R13.2 million paid to Ascul Construction under the premises of it being an “advance payment” was irregular as well as fruitless and wasteful expenditure.

He provided the Committee with the outcomes achieved since the last presentation and said the SIU has instituted civil action by way of a claim for damages to the value of R140 million, which was amended to R95.6 million and the particulars of claim were amended following an exception that was raised. The summons was issued on 6 February 2018 in the name of the SIU as the plaintiff against Ascul Construction, Dan Lucas Sikhosana (Director of Ascul), Zandile Yvonne Mathe nee Makhathini (DDG at DWS) and Mpho Joseph Mofokeng. The status of the civil litigation is that all three of the defendants have pleaded and a notice has now been served for amended pleas to be filed to accord with the amended particulars of claim.

On Lepelle Northern Water, the SIU Investigations revealed serious maladministration and malpractice and its observations on the current state of service delivery in Giyani showed there is currently no water connection and the company that was responsible for the Geotech services and managing the drilling of the boreholes indicated that the normal price for installing boreholes similar to the ones installed in Giyani is around R100 000. In the Giyani Project the price for boreholes including the treatment plant was between R1.2 million and R1.4 million per borehole. The company supplying the water treatment plant indicated that the price range for the treatment plant is between R195 000 to R295 000 and the water treatment plants worked for only a month.

On the status of investigation at Lepelle Northern Water, the investigation into the SCM has been completed and found that the contract was irregularly awarded. As a result the SIU issued summons on 26 November 2018 in the High Court and the civil litigation is an action to set aside the contract to the value of R2.2 billion. The SIU has referred evidence to the Construction and Industry Development Board (CIDB) pointing toward a contravention of the CIDB Act on 6 December 2017. The current status of the matter is that the CIDB is conducting their inquiry.

The CEO of Lepelle has used the institution’s funds to delay and challenge the SIU’s investigations, e.g. there was a review of all the contracts/investigation conducted by an audit firm at the instructions of the CEO. A multitude of lawyer’s letters sent to the SIU during the course of the investigation and further to this, Lepelle has applied for an interdict against the SIU to prevent the Unit from conducting further investigations.

He gave an overview on the status of investigation at Gauteng Department of Human Settlements (GDHS) and the outcomes on the Mhlatuze Water Board. As part of the overall SIU investigation, the evidence and findings of all the individual investigations are being collated and considered by the SIU, with a view to the SIU considering remedial action against individuals where the Prevention and Combating of Corrupt Activities Act has been contravened and governance failures have occurred and reporting requirements have not been complied with.

On new investigations, Adv Mothibi said the SIU has been instructed by the President to conduct an investigation into the purchasing of SAP Licences for more than R500 million; thee payment of R35 million in kickbacks. The proclamation was published on 21 September 2018 and the SIU team commenced work on 21 September 2018 and has already uplifted computers and documentation from the Department.

The SIU has found evidence thus far that indicates that contract value was approximately R950 million consisting of R450 million for the licences plus maintenance over 5 years. There was no needs analysis conducted and there was no budget for the purchase of the SAP licences. No virement or approval of the payments was made to SAP and a total of R285 million was paid to SAP thus far. The State Technology Information Agency (SITA) was not consulted as was required for such purchases, and in fact SITA advised the DWS against proceeding with this contract. The SIU’s timeframes for the completion of this investigation was to initiate civil litigation in the first quarter of 2019 and the Interim Presidential Report completed by 31 March 2019.

 Discussion

Mr T Brauteseth (DA) referred to the resignation of staff and the financial implications and asked for comment on the chances of recovery of funds. He asked for the Committee to be provided with the actual reports on Vuwani, Giyani and Lepelle. On the ongoing investigations, he asked when the SAP contract was concluded and if there was data available even if the investigation was ongoing.

Adv Mothibi said civil processes will be instituted where possible, in the same vein as criminal processes. The reports have been submitted and as a matter of practice and law, it became the President’s reports once submitted. He said he was aware that the President was currently releasing those reports to various State institutions and will enquire and report back to the Committee whether those reports can be submitted.  The SAP contract was concluded on 26 July 2016 and the investigation has really just started. Further information as it will be uncovered will be provided to the Committee as regularly as possible.

Mr Brauteseth referred to the four year delay in the recommended disciplinary action as reported. He asked for the Committee to be provided a schedule of when a matter started, how long it has taken and the current status. 

Mr C Kekana (ANC) referred to slides where Adv Mothibi cited ‘insufficient evidence’ and asked for a timeframe the SIU had for conclusion of these matters. He asked if the Department was cooperating and also noted he was happy with the SIU’s progressive report.

Adv Mothibi replied that the SIU has already written to the Department in relation to those matters and the feedback will be reported to the Committee.

The Chairperson wanted to know how it was possible that the Department did not find sufficient evidence if the matters were referred based on uncovered evidence.

Adv Mothibi said that was the basis on which the SIU was engaging with the Department because these matters were referred to the Department with evidentiary packs, similar to how manners are referred to the NPA for prosecution. If there was a gap in the evidence it should be communicated to the SIU and it might be available.

The Chairperson said it was the same with GDHS where referrals were made in November 2017 and it was already 12 months later.

Adv Mothibi said in the past the SIU did not follow up with State institutions and some referrals dated four to five years back. As part of the new strategy, SIU followed up and also wanted an explanation why action has not been taken.

Ms V Mente (EFF) referred to slide 35 and asked for clarity on the officials involved and if there was a progress report on cases referred to the NPA in April. She referred to the pushback by the CEO and asked if the SIU incurred costs to fight the interdict and what the current status. 

Adv Mothibi said the officials are not named because they have not been officially charged by the NPA and the SIU has not yet received any tangible feedback from the NPA. The SIU will be engaging with the NPA in the next few weeks on referred matters. On the interdict, he said pleadings have been closed on this matter and was ready to go to court. The SIU was arguing against the interdict and was definitely incurring costs, but will probably argue for a cost order at the end of the process.

Ms N Khunou (ANC) suggested that the next SIU report on any department or entity should include the progress and status of the SIU and the NPA. A case started in 2010 cannot be ongoing in 2018. At the last meeting Adv Mothibi said it was difficult to pursue a case when an employee resigned. The Public Audit Amendment Bill was just passed that stated that implicated employees will be tracked if employed by other government departments. She asked what was preventing the SIU to pursue people and cases to its conclusion if the Act empowered it to do so. The report had no timeframes and that was why it was important that all stakeholders are present. She referred to slide 13 where the matter started in 2012 and she asked for clarity when it was finalised. She asked what happened to the officials who refused to provide the documents, because it was unlawful. She referred to slide 16 and asked for clarity on the amounts referred for recovery.

Adv Mothibi agreed that stakeholders should appear before the Committee together. In terms of the SIU Act, if during an investigation criminal activities are uncovered, the law required the SIU to refer the matter to the NPA. The SIU Act also stipulated that the matters that have been referred to the NPA have to be dealt with in a manner that served the interest of justice and there was no timeframe in that regard. It was agreed that these matters have to be expedited so that action can be taken and that there was speedy consequence management. The SIU has decided that it was in its interest to know how far matters were and why there are now follow-ups. The SIU cannot determine timeframes for the NPA or other government institutions. On pursuing employees who resign, he said resignations terminated the employer/employee relationship and an employer cannot take action as that employee. If there are criminal acts related to that employee who resigned, there was nothing that lawfully impeded pursuing that person criminally. Similarly in pursuing that person civilly, within the laws of civil litigation, if it was proven that the person caused losses to the State. Employees who resigned and moved to other departments can still be pursued, because government was still the employer. 

Ms D Ross (DA) referred to the advance payment in Vuwani and said it was blatant fraud because of the implicated persons’ connections to Eskom. The recommendation made by the SIU save R8.5 million, but R29 million had already been paid. He asked about legal instruments that can be used such as criminally pursuing the matter and mentioned that aid the implicated Ms Zandile Makhathini made a presentation to a committee today. The Public Audit Amendment Bill provided for attachment of liabilities in the form of a letter of debt that will be served on the accounting authority and he asked how this could possibly assist the SIU. He referred to the R285 million paid to SAP and he asked if it was criminal transgressions in terms of the Public Finance Management Act (PFMA).

Adv Mothibi said it was the finding of the SIU that the advance payment was irregular and contrary to the PFMA. Conflict of interest matters are so pervasive. Doing business with the State while employed by the State was prohibited, but the practice was rife. It spoke to the monitoring systems and prior to a company doing business with the State there should be a check. It was expected that there should be an appropriate declaration of interest, but many officials have been found to have not declared their interests. There should be consequence management when it happened to have a deterrent effect. The SAP investigation just commenced and there was no further information at this stage.

Ms T Chiloane (ANC) asked for clarity on slides 20 and 24 where there are no names and no amounts and on the matters closed due to insufficient evidence.

The Chairperson added that the referral was made in 2013 and the decision to close the matter was made in 2018 and the Department should talk to that.

Adv Mothibi repeated that it was through the follow-up the SIU discovered the matters have been closed when the expectation was that the Department would have taken action. Names are not included, because the matters have not been concluded. Slide 22 gave the overall amount of R8.9 million paid to officials by the Department. He said the SIU will provide the Committee with a breakdown of the amount per official.

Mr S Booi (ANC) asked about a Minister’s directive and pursuing officials following that directive. He also asked about the lack of service delivery and criminality and those lawyers assisting implicated officials and criminality.

Adv Mothibi said the SIU’s understanding of the Public Audit Amendment Bill was that when the Auditor-General made a finding around irregular or wasteful expenditure, he should be able to, once all the processes have been followed, issue a certificate of debt or refer to SIU, Public Protector, etc. In some instances the accounting authorities would say they were acting on a directive. The law was clear that if a directive was given and it was irregular or unlawful, an accounting authority should know not to carry out the instruction.

The Chairperson asked if the SIU came across irregularities as a result of directives or an improper implementation of directives.

Adv Mothibi said part of the investigation looked at authority levels and findings are made at different levels of the procurement process. The PFMA clearly outlined the responsibilities of the accounting officer and the executive authority and to date; the SIU has not come across any directive or instruction by the executive authority of the Department that was illegal or unlawful. On service delivery, he referred to Vuwani where Ascul was given the contract and the subsequent failure to deliver services was because the company did not have the competence to deliver. This was because they misrepresented their competence levels and their grading to the CIDB. That misrepresentation was a criminal act and it has been referred.

National Treasury on DWS and the Water Trading Entity

Ms Ulrike Britton, Director, National Treasury, summarised the audited outcomes for 2017/18 and 2016/17; budget management; major virements; payables and accruals; irregular expenditure; and the 2018/19 second quarter expenditure for DWS. In additon she covered the audited outcomes for 2017/18; financial liabilities to the Trans-Caledon Tunnel Authority (TCTA); the debtors age analysis; and Paymaster general account balances for the WTE.

Discussion

The Chairperson said this assisted in contextualising some of these matters. 'War on Leaks' was a continuous programme, but it was not properly placed and therefore not properly budgeted for - the expenditure was taken from administration. The Department should be able to explain how this came about, as well as on compensation of employees. It was a sly strategy to complain about capacity, but not employing people, but then using that money for other things. He referred to the virements and bucket eradication that did not have a budget. These buckets were supposed to have been eradicated and it was one of the areas the Committee may have to look at. 

Mr Brauteseth said the debtors age analysis was interesting. District municipalities are at R1.3 billion and local municipalities at R2.9 billion and water made up R12 billion. He asked for comment on write-offs or applications for write-offs from the Department. Has the Department just written off on its own or with Treasury’s approval?

Ms Britton said section 38 of the PFMA placed the obligation of managing liabilities on the Department itself and if there was a write-off it would be done by the Department. Treasury did not have the authority to approve it or not. Write-offs are disclosed in the Annual Report and the age analysis showed what has not been written off.

The Chairperson asked the Department to look at the issue of write offs for the upcoming meetings.

Mr Ross asked for clarification on major virements - bucket eradication at R72 million and another R154 million for compensation of employees. He asked if it was irregular or unauthorised expenditure.

Ms Britton clarified and said the virements showed in the table was done before the adjustments budget. The R72 million would be included in the adjustment appropriations money for the water and sanitation services pogramme, i.e. included in the R738 million (slide 5). Despite moving R72 million in the adjustments budget and addidng another R40 million after the adjustments budget, spending on this programme was R1.1 billion against an appropriation of R778 million. Any virements would add money to the programme that might reduce the unauthorised expenditure. Irregular expenditure did not pop up clearly in the budgeting information and can only be verified at the end of the financial year by the Auditor-General. For example, slide 5 showed over-expenditure of R203 million, largely for bucket eradication any irregular expenditure related to the Giyani project, but also the indirect allocation for the Regional Bulk Infrastructure Grant and whether that spending was irregular will be for the Auditor-General to determine. Any adjustments the Department might have made to reduce compensation of employees was in contravention of the Appropriations Act and would be deemed irregular.

Ms Khunou referred to the unbudgeted deliverables which was not addressed.

Ms Britton referred to slide 5 and said these are unbudgeted deliverables where there was a misalignment between the budget and the Annual Performance Plan and what was actually happening on the ground. When a project moved faster or slower than expected and money was moved around, those deliverables are created. These shifts always happened towards the end of the financial year.

The Chairperson said all this will be discussed tomorrow and he asked for a three-year update on the shifting of the money to assist the Committee to ask the appropriate question to the Department.

The meeting was adjourned.

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