Documents: Nexus Forensic Investigation Report
The Committee was briefed on the findings of the Nexus forensic investigation into the Integrated Financial Management System (IFMS). Treasury said the investigation arose from an audit undertaken by the Treasury internal audit committee. A draft report was completed on 2 July 2018 and the report was handed over to Treasury on 28 August 2018. Following due process, the IFMS Forensic Investigation Report was sent to all parties and persons mentioned in the report for comment by 5 December 2018. Comments were received from two of the four service providers and all nine Treasury officials responded. The report noted irregular and unauthorised expenditure. A reference group which had been established to advise the Treasury Director General would complete its work by end April 2019 and would provide a progress report on addressing the organisational findings of the report and consequence management action would follow due process. Treasury noted that the Nexus Report findings mirrored what the internal audit committee had found. There was irregular expenditure totaling R273m and unauthorised expenditure of R17.8m.
Treasury said that the Nexus Forensic Services Report pointed out all the organisational challenges and Treasury was doing something about this as well as working on service provider payments and recovering money and imposing sanctions. Treasury was also following consequence management against Treasury individuals that the report had recommended. If criminal action needed to be taken it would be done once work was finalised in April 2019. Treasury had not kept the work on the report in abeyance; it was still reacting to the responses garnered from the nine individuals implicated in the report.
Members asked if Treasury had looked at using open source software; if the use of SAP was investigated; why after 15 years was there no transformation of SAP IT personnel; where was the list of implicated officials and what steps would be taken against them to recover the money; the Director General was the accounting officer and Treasury was not following its own rules; software licence fees had been paid but the government was only using a fraction of the licences it paid for; and what had happened to Mohamed Cassim. Members said that all the problems mentioned in the report arose because Treasury did not follow Supply Chain management (SCM) process. Members said there was repeated evidence of gross incompetence in the report.
Members asked how many service providers were involved in the IFMS project between 2005 and 2015; what was the status of the project currently and at what stage was it; the Auditor General had reported every year since 1999 about the huge wastage in government spending and this could not go on. Government was budgeting for money to disappear. Members said Treasury should not be staffed only with accountants; there should be other specialists such as IT specialists so the supply chain could be controlled.
Members asked how many Treasury officials were involved in the irregular and fruitless and wasteful expenditure or corruption. Was it only the nine mentioned in the report? How many of these officials resigned? It seemed as if the DG was defending the Treasury officials. Members said the role of the DG was to ensure that what took place did not happen again. Members asked what the total budget spend on the project currently was; if legal action would be taken against the nine officials; the report did not report on political oversight; the previous Director General had never responded to the original internal audit committee report that had alerted Treasury to the problems; how much collusion was there; if there were penalty clauses in the service provider contracts; the impact of cancellation where contracts were terminated; and if sections 81 and 82 of the PFMA on financial misconduct had been applied.
The Committee was concerned about the slow speed of the investigation and Treasury’s response. The Director General as accounting officer had to put measures in place in response to the findings.
Mr A McLaughlin (DA) said he was dissatisfied that the 485-page report was given to the Committee one day before the meeting and that this was unacceptable.
Mr B Martins (ANC) agreed and said it would affect the interaction with the Department.
Mr N Gcwabaza (ANC) expressed his displeasure that the report was given to the Committee at the end of the Fifth Parliament, when the Committee had been the first to discuss the IFMS issues. There was nothing the Committee could do now. This was undermining the Committee and was unacceptable.
Ms M Manana (ANC) said she had only received the document that day.
The Secretary noted the presentation had been received from Treasury the day before while the Nexus Report was circulated on 1 March.
National Treasury on forensic investigation of Integrated Financial Management System
Mr Dondo Mogajane, Director-General: National Treasury, apologised for the late distribution of the report. Initially a Treasury document had been leaked to the media and that had been the last time Treasury had had an interaction with the Committee. Since then it had interacted with SCOPA. The invitation to meet the Committee had arrived the day after the budget on 21 February.
The investigation arose from an audit undertaken by the internal audit committee of Treasury. Nexus had been appointed to do the forensic investigation on 1 February 2018. Treasury had been in front of the Committee in 2017 but the terms of reference for the investigation had not been detailed enough and therefore the Deloitte Report had not been satisfactory.
Nexus Forensic Services was appointed and commenced the IFMS forensic investigation on 1 February 2018 and the draft report was completed on 2 July 2018. There had been engagement between the Internal Audit Committee and Nexus and Treasury had led the process. The report was handed over to Treasury on 28 August 2018. He had established a reference group of senior Treasury officials to advise him on the report and process. SCOPA had showed interest in the work and a presentation was given to SCOPA on 20 November 2018. He said Nexus thought the report was final while Treasury thought the report was a draft.
Following due process, the IFMS Forensic Investigation Report was sent to all parties and persons mentioned in the report for comment by 5 December 2018. Comments were received from two of the four service providers and all nine Treasury officials responded. Treasury then strengthened the reference group with external expertise including legal expert, contract management and PFMA specialists.
Service Provider 1 had served Treasury with a notice of breach of contract, the reference group’s work would be completed by end April 2019 and they would also provide a progress report on addressing organisational findings. Consequence management action should follow due process. The Nexus findings contained what the internal audit committee had found. There was R273m irregular expenditure and R17.8m unauthorised expenditure.
On Service Provider (SP) 1, the report said there had been a conflict of interest in the process leading to irregular expenditure. Treasury had failed to exclude SP1 from the tender process due to non-submission of back-to-back agreements which was a mandatory requirement; failure to contract with bidder name in the amount of R164.8m and SP7 was substituted with SP6 during the contract period with a 30% increase in contract price from the original agreement. He noted that SP1 and SP1 Consortium were not the same entities.
On SP5, the report said there was unauthorised expenditure in the form of spending exceeding the budget in the amount of R15.7m.
Mr Mogajane noted that SITA played a bigger role in IFMS 1 and the report recommended that SITA terminate contracts with SP8, SP9, SP10, and SP11.
On IFMS 2 and SP1, the report said the settlement of a contract in IFMS 1 and for it to be continued in IFMS 2 with a settlement amount of R383m was agreed to but there was an inability by Treasury to provide proof of the rationale behind the settlement calculation of R383m. It added that the failure to terminate IFMS 1 agreements between Jan 2014 - Dec 2017 had led to legal wrangling and was the reason Treasury was taken to court by SP1. Mr Mogajane noted that there was a relationship between SP1 and SP6.
The report said the allegation of a fraudulent signature of a Treasury official regarding the settlement agreement with SP1 was found to have no basis.
The report said SP1 and SP6 licences were withdrawn and any payment made to SP1 for the cancelled licences would amount to fruitless and wasteful expenditure. IFMS work was based on a platform owned by SP6 and Treasury now had a direct relationship with SP6 (Oracle).
The report noted the irregular expenditure of R19m. As the agreement with SP1 was irregular, therefore all subsequent payments were irregular including the mobilisation fee of R19m.
On the Project Management Office, the report said Treasury needed to determine under which contract SP3 rendered services to determine if payments were in line with services rendered. This would be followed up by Treasury.
The report noted there were failures in the payments because not all correct documentation was attached.
The correct documents needed to be in place before payment could be made. Action had to be taken on SP6’s appointment as Commercial Off-The-Shelf (COTS) manager and against SP9 and SP6 for providing misleading statements on tender forms.
The report said there was fruitless and wasteful expenditure in the SP6 licence maintenance fee of 17% regardless of licence use. If licences were not being used, this portion of the payment would be considered fruitless and wasteful expenditure and Treasury had to determine the exact number of licences in use to calculate the value of fruitless and wasteful incurred. Mr Mogajane said Treasury had found creative ways to use the licences in all government departments using Oracle.
Ms Zanele Mxunyelwa, Acting Head: Office of Accountant General, said R73m had been saved to date.
Mr Mogajane said this was in contrast to the Auditor General finding that that there was R67m in fruitless and wasteful expenditure due to unused licences. It could now be seen that the Department was now getting value for money.
On IFMS 2 payments, the report said an IFMS team member had travelled on non-IFMS matters but the expenses R29 900 had been linked to the IFMS account erroneously.
No conflict of interest had been found as recorded in the IFMS Forensic Report.
The organisational related findings that were currently being addressed were:
▪ Document Management - a project had been initiated which included Auditor-General SA.
▪ SCM processes - SCM officials were being re-trained.
▪ Contract Management - the process to appoint a contract management specialist was underway and controls have been enhanced.
▪ Budget Control - time, material or deliverables, milestones and evidence to be submitted must be stipulated.
▪ Project Expenditure - the correct documentation had to be attached and Finance had to verify all required documents prior to payment.
Other findings being addressed were:
▪ Project Initiation Controls/ Project Takeover Controls
▪ Project Management
▪ ICT controls
▪ Project monitoring and evalaution
▪ Combined Assurance
▪ Risk Management.
Mr Mogajane noted that the Nexus Report pointed out all the organisational challenges and Treasury was doing something about these as well as working on the service provider payments and recovering money and imposing sanctions. Treasury was also following consequence management processes against Treasury individuals that the report recommended be taken. If any criminal action needed to be taken it would be done once work was finalised in April 2019. Treasury had not kept action in response to the report in abeyance; it was still reacting to the responses garnered from the Treasury nine individuals implicated in the report.
Mr N Paulsen (EFF) said one always had to pay licence fees for propriety software. SITA was useless because there was open source software that could have been used. Where was SITA or government’s own tech experts? Did Treasury look at using open source software? Was the use of SAP investigated? Why after 15 years was there no transformation in SAP IT personnel. SITA needed to be revisited as it was not developing such in-house skills. He asked where the list of implicated officials was and what steps would be taken against them to recover the money.
Mr McLaughlin said the Director General was the accounting officer and Treasury was not following its own rules. Software licence fees had been paid but the government was using only a fraction of the licences it paid for. The discount government received for the bulk purchase of licences was not financially viable. He asked what had happened to Mohamed Cassim. The report only stated that action needed to be taken which implied that no action had been taken. All the problems mentioned in the report arose because Treasury did not follow SCM process. There was the instance of ICT-Works which had been told it no longer needed to return funds to Treasury but instead to pay Oracle for licences. Yet this was followed up by a letter contrary to that decision where Treasury wanted to pay Oracle for licences directly. He asked how and why Service Provider 1 was not excluded from the tender process due to non-submission of back to back agreements leading to irregular expenditure irregular expenditure of R164.8m and what were the consequences. There was repeated evidence of gross incompetence in the report.
Mr M Shackleton (DA) referred to the substitution of SP7 with SP6 during the contract period with a 30% increase in contract price. If this happened once, was there space for this to be repeated? Who approved the substitution, and could the system prevent such incidents from occurring again? Would the SP6 contract be suspended? Was money still being paid to it? He asked what action was taken on SP6 work being allowed to be done in contravention of a suspensive clause in the agreement (slide 8). He asked what the timelines were for specific action for failures in the SCM processes (slide 14). He asked if the document management system tracked that there was no deviation in invoice documents (slide12). He asked what the contract management specialist was employed to do.
Mr Gcwabaza said that the report gave a list of 12 service providers. He asked how many service providers were involved with the project between 2005 and 2015. The report listed nine Treasury officials working on the project since 2005 against whom action should be taken. Where were they? Were they suspended, working, or being investigated? Were any asked to repay monies? What was the status of the project currently and at what stage was it? In the Committee’s first engagement with Treasury, one service provider was contracted to deliver a system. Did it deliver this system?
Ms S Shope-Sithole (ANC) said that Treasury was paying invoices without providing proper documentation. This was either gross negligence or there was a team working to bring down the SA economy within Treasury. The Committee had the power to call anybody, not just the DG, to appear before it. She asked the Chairperson that those people who had been in charge at the time should appear before the Committee. The Auditor General in his reports since 1999 talked of the huge wastage in government spending and this could not go on. Government was budgeting for money to disappear. She said that if the PFMA, which Treasury had promoted, was not implementable then amendments must be brought to change it. She supported Mr Paulsen’s comments calling for the money to be paid back. Treasury should not be staffed with only accountants; there should be other specialists such as IT specialists so SCM could be controlled.
Ms Manana asked how many Treasury officials were involved in the irregular and fruitless and wasteful expenditure or corruption. Was it only the nine mentioned in the report? Hew many of these officials resigned? She questioned what would happen after five or ten years of poor SCM record keeping and payments (slide 5).
Mr Mogajane responded that his point of view about Treasury was that it was a learning organisation, not one that thought it knew everything. Treasury would continue to grapple with complex and diverse challenges and people. He had recently met and discussed IFMS with the SITA Head. Treasury was not geared for IT challenges and SITA was the custodian for IT in government and at some point, the location for the responsibility of IFMS had to be determined.
SAP was not a legacy system like LOGIS and PERSAL and Treasury was still stuck with these legacy systems.
On Treasury not following SCM processes, he said that these should not happen under his watch. Frameworks existed but it was the application that was not universal, therefore the internal audit committee needed to sample throughout Treasury’s operations. He urged the Committee not to say that it had lost complete trust in Treasury.
Mr Mogajane did not have a list of officials since 2005, but the report listed nine officials and 12 service providers. Five officials were still at Treasury. IFMS 1 was led by SITA. The report was not about officials who stole money but about financial management, contract management, and supply chain management. The end date of investigations on the Nexus Report was 14 April 2019.
The IFMS project was divided into three phases. By 2021 the HR module and the procurement module would have been piloted and the last phase would end in 2030.
Mohamed Cassim was mentioned in the report as part of a broader view as Mr Cassim was part of Abacus Advisory, one of the service providers.
On the use of open source software, when IFMS was designed, the solution was based on Oracle.
The list of nine Treasury officials mentioned in the report included Chief Directors, Directors and junior officials.
He acknowledged the comments regarding slides 8, 14 and 12.
The report did not talk about the previous Directors General or Ministers. After the Committee interacted with the report, the Committee could interact with these people. The Nexus report was a forensic report and so it interacted with the bank accounts of ministers and directors general and it did not find anything in conflict.
Anything about paying back the money would be a law enforcement agency task.
Treasury was very transparent in its budget process and ranked number one or two in the world. The report allowed Treasury an opportunity to clean up its processes and on how the budget needed to be executed.
The contract management specialist was not someone Treasury employed. Treasury got someone to advise it and this was only until the end of April.
Treasury’s internal audit committee had picked up areas found wanting and Treasury wanted the audit committee to have its eyes and ears everywhere.
Equity stakes and conflict of interest were issues that needed to be looked at.
A Treasury official replied that Treasury was working with stakeholders to have a document management system and ensure that the system could pick up when contracts expired. On the 5% mobilisation fee, the service provider may have looked at individual contracts, but this was not how Treasury viewed it.
Another Treasury official replied that Treasury had looked at other software before deciding to go with Oracle. Initially the IT model had been a hybrid model, but international studies had showed that it would not be the right model to follow. In IFMS 2 only certain companies were short listed as qualified to provide services.
The Chairperson said the DG seemed to be defending Treasury officials. The role of the DG was to ensure that what took place did not happen again.
Mr Gcwabaza supported the Chairperson’s comments but at no point had the Committee expressed its lack of confidence in Treasury. However, Parliament would ask questions on what it thought was not correct.
He noticed in the report (on p205-7) that it looked like ICT-Works was king of the jungle as it was mentioned most often. There were 12 service providers and there were consortiums of these companies. Could he get clarity on this? Why were prices quoted in foreign currency (p85)? He asked the DG to take them through the Integrated Management System (IMS) process. What was the total budget spend on the project currently?
Mr Paulsen asked when legal action would be taken against the nine officials mentioned in the report. This would act as s a deterrent so the culture of Treasury could be changed because at the moment there was a culture of entitlement in the department.
Ms D Senokonyane (ANC) said nothing appeared in the report about political oversight. Irregular spending in government was not going away. Her impression was that there was an element of collusion. How much collusion was there?
Ms Shope-Sithole said financial statements were tools to assist management. She said there had been an internal audit committee report prior to the current DG’s appointment. Not once had the previous DG uttered anything about the contents of that internal audit report. If that report had been taken seriously, then the current DG would not have been sitting in front of the Committee answering questions on irregular expenditure. The Committee had to protect the internal auditors. Why was the internal audit report not taken seriously and why was nine years allowed to elapse, as that report would have healed the Department. She wanted the monies to be repaid. She asked the Chairperson to call SITA to be present when Treasury next briefed them on the IFMS matter.
The Chairperson asked if there were penalty clauses in the service provider contracts. She asked what the impact of cancellation was when contracts were terminated. Were sections 81 and 82 of the PFMA applied?
Mr Mogajane replied that the currency was dollar denominated. He was not defending department officials and they would be dealt with and the culture of the department would change. Political oversight was not mentioned in the report because of the terms of reference of the investigation, but nothing stopped the Committee from calling anyone to a meeting. If any contract regarding IFMS 1 was illegitimate, then the service provider had to repay the monies paid out.
Treasury not only deals with SITA but also with the Department of Public Service and Administration (DPSA) as SITA now fell under it. The whole government ICT approach was a bigger issue. Penalty clauses were in every contract and compliance was something that would be taken seriously.
On the impact of IFMS, he said it would be fruitless and wasteful expenditure to cancel the project now because the project was just starting to bear fruit. It was clear that that the project took a lot of time in the tedious process of signing the software licence agreement.
Treasury had debated the costs and benefits of buying individual licences versus buying licences in bulk at a lower price and enjoying savings, even though not all the bulk licences would immediately be used.
The next phase of the project was the architecture phase and they were in the process of piloting the design of the common design which was completed in September 2018. SITA had issued a tender in December 2018 which had been exclusionary and so the tender was being relooked at.
The IFMS project spend to date was R2.4 billion. R1.1b was spent in IFMS 1 and had they remained with this original model the cost would have been too expensive. The second IFMS model developed had used some aspects of the work developed and completed for IFMS 1. The Department had a plan for the project for the next two to three years as well as a budget.
On sections 81 and 82 of the PFMA, he asked the Committee to bear with him until the end of April when the reference group would have completed its work.
The political angle made the issue complex and he suggested that the letter of invitation to the Department should include the Minister specifically. The framework of engagement needed to be established for that meeting as there were some answers that the Minister should answer and not the Director General, because it concerned political matters.
The Chairperson said she was concerned at the slow speed that the investigation was moving at and she wanted an accelerated plan. According to the PFMA, the accounting officer had to put measures in place as a direct response to what had happened, as well as all the service provider processes which needed to be corrected.
The meeting adjourned.
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