Deviations & expansions in 2018/19 Quarter 2 & 3: Office of Chief Procurement Officer

Meeting report

Opening remarks
The Chairperson said it is important to ensure that state coffers are accounted for, and the Committee was ready to hear from the OCPO for the reasons behind deviations and expansions during the year in question.

Deviations & expansions in 2018/19 Quarter 2 & 3: Office of Chief Procurement Officer (OCPO)
Mr Vukani Ndaba, Acting Chief Director: Governance, OPCO in National Treasury, highlighted what deviations from the competitive bidding process are according to the Supply Chain Management (SCM) Instruction Note 3 of 2016/17. The Accounting Officer/Accounting Authority must only deviate from inviting competitive bids in cases of emergency and sole supplier status. An emergency procurement may occurs when there is a serious and unexpected situation that poses an immediate risk to health, life, property or environment which calls an agency to action and there is insufficient time to invite competitive bids. Sole source procurement may occur when there is evidence that only one supplier possesses the unique and singularly available capacity to meet the requirements of the institution.

As for expansion of contracts, the Accounting Officer/Authority must ensure that contracts are not varied by more than 20% or R20 million (including VAT) for construction related goods, works and/or services and not more than 15% or R15 million (including VAT) from the original contract value for all other goods and services.

For deviations, applications are closed at the end of the quarter but they become new applications for the next quarter (roll over to the next quarter). This exercise is conducted for auditing purposes.

In Quarter 2, Eskom had the highest number (12) of applications for deviations totalling over R11 billion, followed by the Road Accident Fund (RAF) with a total of R1 billion. Only deviations totalling R10 billion were supported for Eskom, and of that amount R89.9 million had was supported with conditions. For RAF R46 000 was supported and R1 billion supported with conditions.

In Quarter 3 there were more applications from various entities and the values of the amounts requested were higher compared to the Quarter 2, particularly Eskom requesting an enormous R15.4 billion, with only R15.3 billion supported conditionally. This was followed by the Department of Environmental Affairs, with just over R500 million that was supported with conditions.

In Quarter 2 Eskom also led with the number applications for expansions with over 30 applications [see document for detailed figures and rankings).

Members would notice that some of the values were different because at the time applicants approach the Office of the Chief Procurement Officer the figures are estimated.

In conclusion, Mr Ndaba highlighted remedies that Accounting Officers and Authorities should be held accountable when procurements are done through deviations or contracts expanded beyond the prescribed threshold. Furthermore:
- Procurement through deviations on the basis of emergency or sole supplier must be published
- Provincial Treasuries must publish deviations and expansions for provincial departments and local governments including their entities
- There should be consequences for poor planning
- Lifestyle audits should be performed on senior managers and/or board members of institutions with a high number of deviations and expansions
- No institution should be allowed to have “evergreen contracts”
- National Treasury should increase the number if these are commodities on transversal contracts.

Discussion
Ms S Shope-Sithole (ANC) said that she was interested on the Excel document that would break down the presented information. Secondly, transparency in the provinces was important; hopefully follow-ups would be undertaken by the Office of the Chief Procurement Officer. She asked whether the assessments undertaken by the OCPO were also conducted on Treasury procurement.

Mr M Shackleton (DA) said that slide 4 mentioned that deviations were allowed for different things – he asked if it would be possible for Treasury to bring the thresholds down; particularly the 20% or R20 million and 15% or R15 million. There are entities where the accounting officer or authority did not get the deviation or expansion during the reported periods. However it was important to ensure that there were consequences. He asked if there were consequences for applicants that defied the procedures.

Mr Shackleton said that, for Eskom, it would assist the Committee if more information would be provided about the conditions imposed where applications were granted. He asked if the proposed lifestyle audits for senior managers and board members would eventually be done or if plans have already been put in place to make these come to fruition.

Ms D Senokoanyane (ANC) said that the breakdown of information was helpful but it was not comprehensive enough. She felt perhaps more text or information on the figures presented would provide more detail. It would assist the Committee if the Office of the Procurement Officer indicated the steps it would take on deviations and expansions, what interventions it has done so far. As the oversight committee, it is difficult for Members to scrutinize such limited data.

Mr A McLaughlin (DA) asked if the statement on slide 6 was correct about accounting officers and authorities: “Some Accounting Officers and Authorities think the role of National Treasury is to approve the appointment of a supplier, whereas the role of National Treasury is allow an institution not to advertise a bid but invite as many suppliers as possible and assess the proposals or quotations through a bid committee”. If that were the case, it created room for corruption. He asked if there was a correlation between deviation and expansion because when an entity deviates it might land up with an expansion. Does the Office have a way of ascertaining that to avoid authorizing the same thing twice?

The Chairperson noted that National Treasury appeared on the list of applicants. She said that the Committee would rather prefer that Treasury led by example. She said unequivocally that it sets a bad example and it can do better. She asked if there were consequences for entities that failed to adhere to the conditions of the deviations or expansions. What happens when deviations or expansions are not granted and an entity fails to adhere to that decision?

She asked about the causal effect of deviations and expansions. A clear explanation of an ‘emergency’ was required. She asked if OCPO was able to highlight the procurement challenges faced by Eskom.

Ms M Manana (ANC) asked if single source procurement without prior approval from Treasury was allowed. Secondly, she asked for the difference between single and sole source.

Ms Sekoanyane asked why accounting officers were not complying with the regulations and the Public Finance Management Act. Is it lack of capacity that leads accounting officers to failing to adhere to the regulations and legislation?

Mr McLaughlin asked if the Office investigated the details of applications for deviations and expansions.

Response
Mr Ndaba replied that the OCPO would perform physical verification exercises where necessary before approving a deviation or expansion; but in some cases it is impossible to do so. He explained that a single source is where there is more than one supplier in the market for a specific commodity but the applicant prefers approaching a specific supplier. This happens for a number of reasons. A sole source is when there is only one supplier for a commodity in the market. With a single source, the challenges come in when the suppliers are not able to provide the quantity or the packaging required by the applicant or the rest of the suppliers in the market would not be able to provide the required quantity and/or packaging of that commodity.

Ms Mpho Nxumalo, Chief Director: SCM Policy & Legal at National Treasury, added that even if there are other players in the market for a single source, the challenge may be that those players are unable to produce the required quantity, scale or it would require a lengthy period of time for those suppliers to produce the quantity required.

Mr N Ngcwabaza (ANC) said that there have been cases where suppliers have challenged the decisions for awarding tenders to suppliers that are undeserving.

Ms Nxumalo said that the Department of Health purchases large quantities and they require that when you supply it should be packaged in a particular manner. Even if it goes out on competitive bid, prior to going out for competitive bid there is a market assessment that must be conducted to ascertain the players in the market. This provides an understanding of what mechanisms should be utilized in order to encourage the market to transform. Then the applicant can structure the bid to ensure that it includes transformative characteristics.

Mr Ndaba replied about bringing down the thresholds, saying that previously entities would do as they please and there was a lot of push-back from them. There should definitely be a change, and this will be explained in more detailed in the Quarter 4 report.

Ms Nxumalo added that the OCPO can reduce the threshold values and consider what methods should be employed to procure. It is currently reviewing prescripts such as the Standard Document, but with that said at the moment there is lot of duplication. The OCPO should also ensure that there are certain standard documents that speak to different entities such as PSIRA as there are some entities that are more complex and complicated.

Deviations and expansions are created by poor contract management in various entities but there is a framework to address the challenges although implementation is a bigger challenge. The OCPO has developed a guideline on how to implement contract management for entities. In addition, OCPO has started training in some entities.  The first leg of training will commence next week and the first targeted entities are provincial treasuries.

The other deviations and expansions stem from the PFMA, particularly where organs of state participate in bids from other organs of state. Most organs of state do not follow proper procurement procedures when procuring from other organs of state. To mitigate some of these challenges, the team has developed a guideline on MFMA and PFMA to ensure that organs of state that take part in bids from other organs of state do so according to the legislation.

On the difference between deviations and expansions; in actual fact, they are all deviations but the difference is in the reporting. A certain procedure is followed when reporting on expansions in contrast to deviations.

Ms Nxumalo then affirmed that National Treasury was not exempt, and it should also be subject to scrutiny.

The OCPO always ensures that in its correspondence with entity accounting officers or authorities that it copies in the Office of the Auditor General. This ensures that when or if an entity fails to adhere to the decision of the Office of the Procurement Officer, the AG would have a point of reference for that specific transaction and it may be recorded as irregular or fruitless and wasteful expenditure.

In this context an emergency is something that cannot be planned by the entity or the accounting officer, maybe a natural disaster. Sometimes contract management overlaps with administrative matters which do not necessarily equate to poor planning.

Mr N Paulsen (EFF) said that EFF Members wanted a breakdown of the Eskom deviations in order to see “how much money went to the IPPs, Jeff and Patrice”.

The OCPO delegates committed to furnishing a detailed spreadsheet on the breakdown of the amounts and from where the deviations came. This would be sent to the Committee in writing.

The Chairperson thanked the Office of the Chief Procurement Officer for the briefing but appealed that it ensure all the required information and spreadsheets were sent to the Committee as promised. She thanked the team for clarifying that when correspondence takes place, the Auditor-General is always copied in to ensure that should an entity fail to adhere, the AG may record that as irregular or fruitless and wasteful expenditure. She commended the team for those efforts.

Minutes dated 4, 5, 7, 12, 14, 20, 21 and 27 November 2018 were adopted with a few attendance amendments. The joint committee meeting minutes would need to be adopted by both Committees and once the two committees have considered the minutes; they would then be formally adopted by the Committee.

The meeting was adjourned.