National Treasury Integrated Financial Management System (IFMS) forensic report: hearing

Public Accounts (SCOPA)

05 December 2018
Chairperson: Mr T Godi (APC)
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Meeting Summary

Relevant documents: 
Integrated Financial Management System (IFMS) forensic investigation: update, with Deputy Minister 20 Nov 2018
Integrated Financial Management System (IFMS): hearing with National Treasury 05 Jun 2018
Integrated Financial Management Systems (IFMS): National Treasury briefing; with Deputy Minister of Finance 06 Mar 2018
Integrated Financial Management System (IFMS): hearing with Treasury, with Minister of Finance 29 Aug 2017

The Committee met with National Treasury for a follow-up briefing on the Integrated Financial Management System (IFMS) forensic report.

National Treasury presented the results of the forensic investigation into the IFMS project to the Committee. The forensic report compiled by Nexus Forensic Services identified conflicts of interest, tender irregularities and other failures in the contracting process and recommended that action be taken against officials involved. Some of the matters should be referred to law enforcement agencies. The report said it was possible that no business case/feasibility study was undertaken prior to the procurement from one of the service providers. Twelve service providers were appointed for the IFMS project: ICT-Works, KPMG, Abacus, Apex, Accenture, Oracle, Intenda, IBM, SAP, PiLog, BCX and Barnstone. The forensic investigation found that the appointment of Apex and KPMG for certain aspects of the work was irregular and so were the payments made to them. The appointment of KPMG to the project management office was irregular, as well as the payments of R54 million for this. Treasury officials were found to have not properly implemented, managed, enforced, monitored and reported on one contract, amid other failures, and to have exceeded the budget in another contract. The investigation found possibly flawed procurement processes with bidders failing to declare conflict of interest, non-compliance with supply chain management policy and failures of contract management. Contracts were irregularly awarded to several service providers, meaning all payments made to these service providers were irregular. The Nexus report found that contracts were irregularly awarded to ICT Works, resulting in R165 million in irregular spending. Nexus found that contracts were irregularly awarded to KPMG, Apex and Abacus, resulting in irregular spending of R69 million, R8.8 million and R28.4 million respectively. Another finding shows that three service providers - KPMG, Abacus and Barnstone – failed to declare interest in bid documents for tenders. Nexus recommended that this be referred to law enforcement. While irregular expenditure on the project amounted to R273 million, unauthorised expenditure was R17.8 million. Basic financial management processes were thrown out the door in some instances. The Nexus report had since been made available to those implicated to give them an opportunity to respond to allegations. The implicated service providers and Treasury officials had until December 5 to give full responses, which the DG was yet to consider. Treasury had thus not yet had time to consider the responses of implicated service providers.

Members referred to the role of SITA as highlighted in the Nexus report. They noted that some SITA employees might have caused problems. Who were those SITA officials allegedly having links with ICT-Works? SITA became a bedrock of corruption and there were a lot of compromised people that may have had links with external suppliers. Did officials involved in implementation of IFMS register their interests in companies providing services to Treasury? What was at issue with ICT-Works? As per section 14.6 of the Nexus report, why were the names of non-compliant officials that were involved with Apex not disclosed? On disappearance of invoices (page 14 of Nexus report), was this a common occurrence at Treasury? The Committee was concerned with the fact that some people implicated in the report are former employees of the State Information Technology Agency (SITA) that are currently employed by ICT-Works, a service provider that is implicated in the IFMS forensic report. In relation to IFMS 1, one of the key witnesses there, was ICT-Works. ICT-Works submitted discs that did not meet their contractual obligations. At that time National Treasury was within its right to terminate the contract, but did not. That is what brought us to where we are today, by not terminating and renegotiating more contracts. This raises the question of, if this was the most important system for government, how was it being monitored politically by Cabinet. It would be important to understand that the weakest link of IFMS 2 is the Programme Management Office and all the transgressions happened in that office that was led by Michael Sachs and Lindy Bodewig- these two individuals were key figures in that office and might have landed Treasury into this huge challenge of IFMS 2. It would be up to those two individuals to explain themselves out of this process because it was Lindy Bodewig who raised the project and it was Michael Sachs who approved it. There was also a Mohammed Cassiem whose standing is really questionable in this report and who was overpaid. Who was this Cassiem and what was his role in National Treasury. The Committee was concerned with the leadership of the IFMS project from the beginning and would want to understand how it is currently led politically. The roles of Cabinet and the Minister of Finance in such an important project that impacts on the whole of government should be clarified.

The Chairperson emphasised the need for Treasury to prioritise the IFM forensic report that details the transgressions and recommendations on what actions should be taken against all those implicated. He welcomed the forensic report and extended appreciation on behalf of the Committee to the internal auditors and the audit committee of National Treasury. He pointed out that the internal audit report was the basis of the good report from Nexus and it was the audit committee that initially rejected the low quality report from Deloitte. He implored Treasury to follow and adhere to administrative processes as it should be setting an example for other departments and entities of government particularly when it comes to adhering to Public Finance Management Act (PFMA) and National Treasury Regulations. The Committee looked forward to receiving a progress report from Treasury on how the report would be dealt, particularly after it has engaged with the responses from all the implicated parties.

Meeting report

Opening Remarks
The Chairperson said the Integrated Financial Management System (IFMS) was appreciated as a project that would assist in addressing some of the financial management weakness and challenges within government. The project sought to bring coherence to the operations of the State and should therefore be managed and handled in a manner that reflects its importance. During a previous engagement, horrifying weaknesses were identified in the management of the project. It was critical that action be taken against officials who had acted irregularly. The expectation was Treasury would take the Committee through the measures to implement the Nexus report recommendations. The IFMS project should move from being just an idea to becoming a reality.

National Treasury presentation
Mr Dondo Mogajane, Director-General, National Treasury, presented the results of the forensic investigation into the IFMS project. The forensic report compiled by Nexus Forensic Services identified conflicts of interest, tender irregularities and other failures in the contracting process and recommended that action be taken against officials involved. Some of the matters should be referred to law enforcement agencies. The report said it was possible that no business case/feasibility study was undertaken prior to the procurement from one of the service providers. Twelve service providers were appointed for the IFMS project: ICT-Works, KPMG, Abacus, Apex, Accenture, Oracle, Intenda, IBM, SAP, PiLog, BCX and Barnstone. The forensic investigation found that the appointment of Apex and KPMG for certain aspects of the work was irregular and so were the payments made to them. The appointment of KPMG to the project management office was irregular, as well as the payments of R54 million for this. The Treasury officials were found to have not properly implemented, managed, enforced, monitored and reported on one contract, amid other failures, and to have exceeded the budget in another contract. The investigation found possibly flawed procurement processes with bidders failing to declare conflict of interest, non-compliance with supply chain management policy and failures of contract management. Contracts were irregularly awarded to several service providers, meaning all payments made to these service providers were irregular. The Nexus report found that contracts were irregularly awarded to ICT Works, resulting in R165 million in irregular spending. Nexus found that contracts were irregularly awarded to KPMG, Apex and Abacus, resulting in irregular spending of R69 million, R8.8 million and R28.4 million respectively. Another finding shows that three service providers - KPMG, Abacus and Barnstone – failed to declare interest in bid documents for tenders. Nexus recommended that this be referred to law enforcement. While irregular expenditure on the project amounted to R273 million, unauthorised expenditure was R17.8 million.

Mr Mogajane said basic financial management processes were thrown out the door in some instances. He was not pointing fingers at anyone in the report as they have an opportunity to respond. The Nexus report had since been made available to those implicated to give them an opportunity to respond to allegations. The implicated service providers and Treasury officials had until December 5 to give full responses, which he was yet to consider. Treasury had thus not yet had time to consider the responses of implicated service providers. As Nexus recommended that the DG take action, he would continue to study the report, and take further action where necessary. He further highlighted the summary of irregular and unauthorised expenditures as recorded in the IFMS forensic report as follows:

IFMS 1 and ICT-Works
The Nexus report recommended that: Treasury and SITA verify conflict of interest process as it was possible that there had been no business case/needs analysis/feasibility study prior to procurement. Action must be taken against officials as it was also possible ICT-Works Consortium did not submit back-to-back agreements. Further, action must be taken against evaluation committee for possible omission to address the failure of SAP to declare interest (employee previously worked in IFMS). Action must be taken against officials for: disregarding concerns raised during bid adjudication in relation to scoring and declaration of interest; and poor state of record keeping (SCM and payments). There was also failure to exclude ICT-Works from the tender process because of non-submission of back-to-back agreements which was a mandatory requirement. Lastly, substitution of Intenda with Oracle during contract period with a 30% increase from the original agreement which is above the allowed 15% deviation was flagged.

IFMS 2 and ICT-Works
Nexus recommended that action must be taken against implicated officials if they were unable to provide proof of rationality in the R383 million payment to the service provider; for failure to terminate IFMS 1 agreements between Jan 2014-Dec 2017- the agreement was not properly implemented, managed, enforced, monitored and reported on; and allowing Oracle-related work to be done in contravention of suspensive clause of the agreement. The dispute should be declared with ICT-Works and resolved through litigation. Further, Treasury must terminate contract without paying the R20 million licence, and ensure overpayment to ICT-Works is transferred to Oracle as the latter was then providing the service.

IFMS 1 and Accenture
The forensic investigation recommended that action must be taken against identified officials for making payments which exceeded the approved budget allocation.

IFMS 2 and other service providers
The report recommended that Treasury should determine under which contract Abacus rendered services and whether payments were in line with services rendered. Further, action must be taken against officials: for failing to report Abacus and KPMG conflict of interest as the two service providers and Barnstone did not declare interest in bid documents; for not disqualifying Apex for not having a valid Tax Clearance Certificate; failure to report breach in supply chain management system (conflict of interest matters). The case of misleading statements regarding service provider recusal/present at meetings when design of PMO was discussed and later tendered and appointed to the panel must be referred to law enforcement. 

Mr Mogajane pointed out that although the Nexus investigations identified glaring irregularities, preliminary findings were that no Treasury officials might have benefited financially from any of the transactions. Some of the remedial action being embarked upon was as follows:

Document Management
The document management project had been initiated together with the Auditor-General South Africa (AGSA) and would involve training of the Knowledge Management. Progress of the project implementation was to be tabled at EXCO and Audit Committee, and all officials involved in document management process were currently being up-skilled. Reinforcement training on IFMS document management and configuration strategy has been conducted with all project administrators and the SharePoint super administrator.  IFMS documents are maintained in a SharePoint repository with specific guidelines aligned to the National Treasury’s overall document management protocol. Work is continuing to digitise some older documents pre-2016 documents and upload them on SharePoint.

Supply chain management (SCM) processes
SCM officials were being re-trained to reinforce understanding of SCM processes including any updates. More stringent verification processes were being conducted to ensure there are no errors in process or procedure. The IFMS Procurement Strategy going forward requires probity to be performed on all tenders by an independent party.  Activation of probity is expected to flag conflicts of interest before tenders are evaluated.

Contract management
A process to appoint a contract management specialist was underway. Controls had also been enhanced which includes, checklists to be completed to ensure all requirements are adhered to prior implementation, knowledge sharing sessions with project owners, reminder letters for soon to expire contracts amongst others. All IFMS work parcels performed by service providers are regulated by an “Instruction to Perform Work” (IPW), which stipulates the deliverables, resource hours and financial budget.  All work submitted by the service providers are validated and signed off against the IPW’s before they are cleared to bill for the service.

Mr Mogajane reiterated that appropriate remedial action would be taken as recommended in the report. The Ministers of Finance and Public Service and Administration had taken a keen interest in ICT spending across government departments and the need to address the challenges within this space was crucial. He appreciated the Committee’s assistance thus far.

Discussions
Mr M Booi (ANC) appreciated the report as it represented dedication and a keen interest to have the IFMS debacle addressed on the part of Treasury. He asked for comment on unauthorised expenditures as a challenge within Treasury as identified by the Nexus investigation. Did officials involved in implementation of IFMS register their interests in companies providing services to Treasury? What was at issue with ICT-Works? As per section 14.6 of the Nexus report, why were the names of non-compliant officials that were involved with Apex not disclosed? On disappearance of invoices (page 14 of report), was this a common occurrence at Treasury? KPMG seems to have been quite involved in IFMS 1 and 2. Why was this the case when there were allegations of corrupt practises levelled against the company? Why would KPMG go against its own principles of accountability?

Mr Mogajane replied that the preliminary view was that indeed some of the expenditures that were made at the time were unauthorised. The Nexus report was pointing Treasury in the right direction in respect of contracts which might have to be reviewed. The review process was already underway and was embarked upon since last year and Treasury officials as well as service providers would exercise their right of reply. As soon as their responses are received, Treasury would act to ensure the integrity of the Department is maintained. If it meant recouping the funds from some of the entities, this would be done- no stone would be left unturned. However, preliminary information was suggesting that the investigations found no direct links between Treasury officials and IFMS service providers. On ICT-Works, the understanding that emerged upon transitioning from IFMS 1 to 2 was that the contractual arrangements between the two parties had to be finalised. Treasury was able to process the payments due to ICT-Works and subsequently met its executives on several occasions. Treasury would wait for their response on the issues raised in the report before any course of action could be taken. On disappearance of invoices, it was picked up that some invoices were paid without proper verification; and this would have to be addressed guided by the report recommendations. If any wrongdoing is identified, Treasury would act against the individuals or entities involved and recoup misappropriated funds if need be. This was going to be a legal process after Treasury fully interacts with the report.  

The Chairperson said the Committee was concerned that some people implicated in the report are former employees of the State Information Technology Agency (SITA) that are currently employed by ICT-Works, a service provider that is implicated in the IFMS forensic report. In relation to IFMS 1, one of the key witnesses there was ICT-Works. ICT-Works submitted discs that did not meet their contractual obligations. At that time National Treasury was within its right to terminate the contract, but did not. That is what brought us to where we are today, by not terminating and re-negotiating more contracts. This raises the question, if this was the most important system for government, how was it being monitored politically by Cabinet? It would be important to understand that the weakest link of IFMS 2 is the Programme Management Office and all the transgressions happened in that office that was led by Michael Sachs and Lindy Bodewig- these two individuals were key figures in that office and might have landed Treasury into this huge challenge of IFMS 2. It would be up to those two individuals to explain themselves out of this process because it was Lindy Bodewig who raised the project and it was Michael Sachs who approved it. There was also a Mohammed Cassiem whose standing is really questionable in this report and who was overpaid. Who is this Cassiem and what was his role in National Treasury? The Committee was concerned with the leadership of the IFMS project from the beginning and would want to understand how it is currently led politically. The roles of Cabinet and the Minister of Finance in such an important project that impacts on the whole of government should be clarified. He expressed satisfaction in the DGs briefing and responses thus far.

Mr T Brauteseth (DA) referred to the role of SITA as highlighted in the Nexus report. He noted that some SITA employees might have caused problems. Who were those SITA officials allegedly having links with ICT-Works? SITA became a bedrock of corruption and there were a lot of compromised people that may have had links with external suppliers. He was concerned that some of these individuals might have been involved with Treasury as service providers.

Mr Mogajane said he did not know the names of the SITA officials and would have to revert back to the Committee on this. Mr Cassiem was not a Treasury employee but a service provider affiliated with Abacus.

Mr Francoise Labuschagne, Director, Nexus Forensic Services, said the names of the SITA officials were Mr Gerald O’Sullivan and Nagealin Tuganadar. The former was previously the chief architect at SITA and the latter was previously the government solutions and standards official at SITA.  

Mr D Ross (DA) welcomed the report as a major step forward. When irregular expenditure was identified at IFMS 1, the cost was close to a billion rand and there were calls from some sections that the project be disbanded. What was the cost of IFMS 2 to date? What was the budget for IFMS per year? He emphasised the need for coherent and prudent projects management. Supply chain management was a challenge in almost all government departments and this was concerning. The public expects Treasury to be well above board and should set the example for other departments. It appears that wherever SITA is involves, departments stumble from one problem to another. What were the coordinative efforts between the Department of Public Service and Administration (DPSA) and SITA?

Mr Mogajane said he did not have some of the information at hand and would not want to speculate in an attempt to respond to Members’ questions. On the cost of IFMS 1 and 2, the numbers that were previously presented before Committee had not changed. The steering committee within Treasury was functional and assisting in effort to meet targets. As an example, huge savings had been made through the cross-collaborative approach meant to bring Oracle users to the master contract to realise savings in ICT spend. The average budget for IFMS per year was R350 million. The IFMS was, by nature and design, a complex project. However, many of the identified challenges had been rectified through the strengthening of governance frameworks and controls.

Mr M Hlengwa (IFP) asked how much the cost of the Nexus investigation was. Was proper procedure followed in their appointment? On the letter the DG wrote to the internal audit committee chairperson on 16 November raising concern about interpretation of the Nexus report, it was worrying that Nexus’ ability to interpret legislation was being question. This spoke to a shortcoming which needed to be clarified- it raised fundamental red flags. Further, Treasury’s failure to avail supporting documentation to the investigators despite numerous requests was flagged in a number of instances in the Nexus report. This was concerning as Treasury should be the torch bearer in government. He wanted to know about the extent of SekelaXabiso’s involvement in this whole debacle. It raised red flags to some extent as political linkages and controversies tend to lend at the desk of SekelaXabiso all the time. He appreciated that the DG had gone to great lengths in explaining the issues and was making efforts to provide transparency to the whole process. 

Mr Mogajane said proper processes were followed in engaging Nexus Forensics and the total cost of the investigation was R5.3 million. The processes subsequent to their engagement was well above board. His letter to the audit committee was part of the robust engagements within Treasury. This was an internal working document and views expressed in his correspondence with the internal audit committee were later reconciled. On failure to avail supporting documentation, some of the material being referred to was with SITA, not Treasury- there were clear delays on the part of SITA. The challenge of access to documentation in the Nexus forensic investigation was identified during previous engagements.

Ms T Chiloane (ANC) asked about government’s ICT agenda. Why would Treasury not acquire an open source software rather than a licensed one, to cut costs? What were the benefits of IFMS 1? When should full implementation of IFMS be expected?

Mr Mogajane said a report on progress in implementation of the IFMS project would be compiled and availed to the Committee. In software applications, security aspects are crucial and thus open source software solutions were generally not easy to secure and vulnerable to abuse. Access and confidentiality of government data was crucial. He reiterated Treasury would furnish the Committee with a report on the progress in meeting targets.

Ms V Mente-Nqweniso (EFF) said Treasury must not be committing such glaring errors as outlined in the Nexus report. Was it possible that officials at Treasury did not understand PFMA regulations? She implored Treasury to prioritise the implementation of Nexus report recommendations and ensure there is consequence management. The case of missing documents was concerning and Treasury had to do something about it.

Mr Mogajane said it was possible for some officials to not understand some regulations. Treasury was a learning organisation and the gravity of any transgression was what mattered. Some of the failures to comply with regulations owed to interpretational errors and oversights. However, the wilful intent to flouts regulation was a different matter altogether. He agreed Treasury should be above board. There was no excuse for having missing documents. Pushing for a paperless age and e-filing and to ensure systems are modernised. 

Mr E Kekana (ANC) said Treasury should be exemplary and should attend to the important areas flagged by Members. The non-involvement of the risk management unit in the implementation of the IFMS project raised serious questions. There seemed to be no proper oversight of service provider technical deliverables. Treasury should be leading by example. 

Mr Mogajane said a bulk of the flagged areas had been corrected. Robust risk and projects management was crucial, and Treasury, as part of its broad strategy, was taking these seriously. Most of the concerns raised by the Nexus report and the Committee were already being addressed by Treasury.

The Chairperson emphasised the need for Treasury to prioritise the IFMS forensic report that details the transgressions and recommendations on what actions should be taken against all those implicated. He welcomed the forensic report and extended appreciation on behalf of the Committee to the internal auditors and the audit committee of National Treasury. He pointed out that the internal audit report was the basis of the good report from Nexus and it was the audit committee that initially rejected the low quality report from Deloitte. He implored Treasury to follow and adhere to administrative processes as it should be setting an example for other departments and entities of government particularly when it comes to adhering to Public Finance Management Act (PFMA) and National Treasury Regulations. The Committee looked forward to receiving a progress report from Treasury on how the report would be dealt, particularly after it has engaged with the responses from all the implicated parties.
Mr Mogajane thanked the Committee for its guidance and commented that the questions asked by Members were critical. Implementation of Nexus report recommendations would have to be done parallel to the strengthening of control mechanisms within Treasury to ensure the IFMS programme is implemented efficiently.

The meeting was adjourned.

 

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