Contract deviations and expansions for 20201/22 Quarter 3: Office of Chief Procurement Officer briefing

Meeting report

Office of Chief Procurement Officer briefing

Mr Isaac Fani, Acting Chief Procurement Officer,  gave an overview of transversal contract related issues:

the enrolment/uptake by all the provinces and the associated challenges;
how procurement was used to help with the implementation of the South African economic reconstruction and recovery plan (ERRP);
the number of deviations, expansions and modifications approved, including details of those that were directed to black, women, youth, and persons with disabilities’ companies;
details of the largest deviations approved, including the reasons for the deviations and the profiles of the companies that benefited from such deviations; and
a progress report on the draft Public Procurement Bill.

Some of the challenges that were highlighted included an inadequate number of competent officials; the current resources targeted by other departments for employment opportunities; lack of support from other Government institutions; reluctance to be part of transversal contracts; organs of state not taking up the advantage of using transversal contracts; no enterprise resource planning (ERP) system available to manage the tender processes; and local economic transformation not happening based on the limitations imposed by the current legislative framework.

See presentation for further details
Discussion
 
Mr O Mathafa (ANC) commented on the preferential procurement policy framework and said there was a lot of discussion around its impact on transformation and localisation. How was the new bill going to address the same issues that had become a challenge to achieve in relation to transformation and localisation?

Secondly, on the modification of contracts requested by departments; how did the OCPO ensure that these contracts were not modified in a manner that the current suppliers end up being the sole provider of the goods and services procured? Was there a way to ensure that service providers did not take advantage of the modifications that were coming through as part of servicing the contracts?

Thirdly, as far as OCPO was concerned, how could the challenges of the lack of a central ERP system be addressed?

Lastly, on deviations and budget allocated against procurement plans, normally funds were allocated to plans that were pre-approved to a procurement plan; was there a way for the Office to track that these deviations remain in line with the original intention of the procurement plan?

Ms M Dikgale (ANC) said she had picked up on transversal contracts where there was a challenge of officials that were not competent. This was extremely worrisome because the people who were going to suffer were those that would be receiving the services.

Mr M Shaik-Emam (NFP) asked why some of the structures did not want to comply. How was one able to prevent sole service providers that did not produce a satisfactory performance? Had the OCPO ever identified products that South Africa could introduce? Did the transversal contracts have a specific time period and if they did, was the procurement process started in time to prevent the extension requests that Treasury receives? Were there companies in South Africa that had a monopoly at the expense of empowering the rest of the community?

There was also a major problem that the Committee had identified. It had visited the Eastern Cape where contracts had been given to contractors for schools that were being built. One would find that contractors would be awarded two or three of the same contracts which they did not qualify for. How did they deal with that? Who did the OCPO report to, and what successes were achieved in terms of non-compliance and the failure to ensure consequence management? Could the Committee be provided a monthly report of contractors that did not comply with the terms of the contract, because by the time it was realised there was a problem, a lot of money was lost and escalation kicks in? How many of these service providers were fully compliant, including delivering on time?

Mr A Sarupen (DA) commented on the transversal contracts and said there were provisions in the Public Finance Management Act (PFMA) and the Municipal Finance Management Act (MFMA) that allowed municipalities and departments to piggyback on the tenders of others, but they lost out on economies of scale because of this. How did the OCPO deal with the potential loss of economies of scale when they piggyback on other departments’ tenders? Secondly, what were the main reasons for un-supported deviations and contract modifications?

Mr Z Mlenzana (ANC) said he was concerned about not receiving a report on the companies that benefited from deviations. There were important reasons why the Committee had asked for this report, and it was not the first time that this information had been requested. Was there no way, in the fourth quarter report, to provide a breakdown of the situation, and how entities deal with consequence management on officials that fail to provide this information?

He added that the Committee had persistently been raising the issue of incapacity in the Office of CPO, and it had been more than a year since these issues had been brought to light. Did OCPO have a retention strategy, and if not, why was this not in existence? Considering the recent court ruling that the binding private ruling (BPR) of 2017 conflicted with existing procurement regulations and legislation, what was in place to rectify this and ensure that any loopholes in the legislation were addressed?

The Chairperson said that he was concerned that the position of the Chief Procurement Officer was still in an acting capacity. What challenges did it pose to the organisation to have different people acting in that position? Did it not create problems when institutions opted to participate in transversal contracts?

One of the matters arising from the economic reconstruction and recovery plan was the promotion of local manufacturing -- how had the Office used procurement to promote localisation? How seriously did the OCPO take the matter of transformation in relation to women- and youth-owned businesses, as well as businesses owned by people living with disabilities? He mentioned the 80/20 and the 90/10 rules. Using the 90/10 rule, if one had the cheapest price, one already had the 90% weighting in terms of adjudication. All the other important matters, such as localisation, empowerment, transfer of skills and employment equity, were contained in the 10%.

In the transversal contracts, one of the issues they were confronted with was the professionals such as legal practitioners and accountants who claimed they did not get government work, even though their names were on the database. What was lacking to ensure that these professionals also benefited from the government that they voted for? What could be done by the OCPO?

Did the OCPO believe that sub-contracting was an efficient way of empowering small businesses? He was concerned about the deviations and modifications of contracts.

OCPO's response
 
Mr Fani said that the Director-General (DG) had ensured that the people in acting positions had a level of competence for the job. People that acted had been retained in National Treasury, business continuity had taken place, and they had not lost any knowledge or any information flow from one official to the other. What could be picked up was on the human factor, where the officials would love to have a permanent chief procurement officer (CPO) so that they were certain of the future of the Office and its ability to position itself on a strategic front. His predecessor may have had different thoughts to his own on the direction of the CPO, but those thoughts had been shared with the DG to ensure that there was alignment with regard to Treasury and government imperatives on what the CPO should do.

From an operational point of view, they were seeing continuity and there was a level of confidence that things were going well. However, from a strategic point, there was a struggle, and the DG had indicated to Treasury that he was prioritising the filling of the critical positions.

Referring to the Preferential Procurement Policy Framework Act (PPPFA) and its impact on the broader transformation process, and how the PFMA would deal with transformation as government envisaged it, he said they intended that once the new Bill was enacted, the PPPFA would be scrapped completely. Although they had been able to find a structure through the PPPFA in terms of preference, it had been silent on how they could advance the imperatives affecting youth, women and people with disabilities.

One of the things that had helped OCPO was the Treasury citing what organs of state wished to use as a single source and the modification of contracts. The Office had been able to detect issues around the perpetual utilisation of contracts. It was opposed to the perpetual use of contracts unless there were technical reasons for it. Sometimes, they would have suppliers that had intellectual property (IP) on some of the services that they provided, and in such instances, it would be unwise to test the market because a different supplier would go and buy that IP from the supplier they were trying not to procure from, and would charge the government the markup. There were therefore instances where a single-use supplier in a deviation form was warranted, so they could not totally do away with the single-use supplier, but there were instances where it was not warranted.

However, the PFMA gave these rights to the accounting officer and authorities to make the decision. They had to apply their minds in such a way that it was in line with the Act. Treasury should not "babysit," or should not make it seem that accounting officers and authorities were incapable of making decisions regarding whether a single source was warranted, if there should be a deviation, or whether a contract should be extended. The Zondo Commission had highlighted the areas where there had been poor management and decisions by the accounting officers and authorities in discharging their duties, but Treasury would continue to monitor and ensure these matters were arrested before they became a problem.

The OCPO was not Treasury’s technical expert for all the issues of government. They were looking at the process and ensuring that the process applicable for procurement was done correctly, and not at the technical details regarding what was being procured.

As for the single ERP system, or the system availability, OCPO had been using one specific system until the last three years, when there had been disputes with the supplier and the use of that system was discontinued. It had helped to make sure that procurement worked seamlessly on the tendering process. For the last three years, the unavailability of the system had been an issue, but they were expediting the process and the DG had also advised as such. The system enhanced operational efficiency so that it did not take too long. If one looked at the volume of the applications received for tenders, there were thousands, which also created bottlenecks in their processes. Expediting the system was critical, but the benefit of having a centralised procurement system was that it would provide sight of expenditure and procurement transactions. The OCPO’s ability to monitor and pick up trends would be enhanced. Thus, it was important to have a single repository system.

On an annual basis, OCPO receives the procurement plans which outline what the organs of the state were planning to procure in the year. On a quarterly basis, the Office samples and analyses the progress of these procurement plans and see, from historical information, the risks that exist regarding service delivery. It was impractical to analyse all the procurement plans, but they do a sample. Where they see a deviation from procurement plans, they request reasons why the procurement plans were not being implemented. What they had not done, but would do moving forward, was to indicate on the procurement plan about whether the organ of the state would be on an open tender or single source so that they could interrogate the procurement plan upfront. These conversations must take place before they apply for deviations and the utilisation of a single source. Treasury had limited resources to ensure compliance, but they would try to work smarter on this.

The officials were competent to perform and discharge their duties on the current transversal contracts. These contracts were put centrally and were given to the departments, and they were supposed to procure out of those transversal contracts, but the problem was where they received challenges about whether the officials in the departments were competent. The OCPO did not have many resignations and they were not losing an alarming number of officials, which meant their competent base was still solid. However, because of that solid competent base, the officials were targeted for placement in other departments, which was the risk they were sitting with. This would result in a high turnover, which would eventually cripple us.

Currently, the maturity of the procurement process was not at the level where they start looking at other commodities that were required, but to ensure that they reach a maturity level they were analysing the procurement plan and the spread that government has currently. If they pick up volumes and repetitiveness of procurement of the current commodities, they analyse it and determine whether it should come to National Treasury for inclusion as a transversal contract, or if it should remain in the province, to ensure that the province leverages in the footprint concerning the suppliers. Alternatively, should it just be a local transformation matter that could be supported through the quotations.

On challenges and experiences in the provinces, the PFMA had empowered the provincial treasuries to provide an oversight role in the provinces. If it became a matter of national interest, it was elevated to the national level.

Consequence management was covered in the framework for the condonation of irregular expenditure. National Treasury would not entertain any irregular expenditure if consequence management had not been implemented. OCPO could indicate how many condonations they had received, how many had been supported and how many were not supported, and this could be provided to the Committee. However, they might not be able to disclose what consequence management had been taken due to the sensitivity of litigation, where the information might be disclosed without the permission of the affected parties.

Mr Mlenzana said that he would not appreciate this matter to be presented as a bypass because it implied that at no point the Committee would be able to get this information. Why were Members not being told what was currently done?

Mr Fani said the details that could be disclosed would include the nature of the irregularity, the costs, the supplier -- because the supplier would know that there was an irregularity -- and what consequence management had been taken. What they could not disclose were the details of the implicated persons who were undergoing a disciplinary process.

He said that when a deviation request was sent to National Treasury, they test it in line with the legislation. If the legislation did not support that type of deviation or modification, Treasury would not support it, and if the organs of state went ahead and implemented against the legislation, then irregular expenditure would be recorded against them by the Auditor-General (AG), and it would not be condoned. All the matters that they had not supported were all the matters that would conflict with the law had they supported the deviation.

He apologised to the Committee for not availing the information on who had benefited, but in the report for the fourth quarter, there would be full disclosure of the information requested. Things had not yet been finalised, but once it was, it would be made available to the Committee. This had been brought to his attention by the Committee Secretary.

Consequence management was not the responsibility of National Treasury -- the condonation framework and the PFMA placed that responsibility on the accounting officer or executive authority. If any irregularity was picked up, the accounting authority must provide the reasons why it had happened and what it would do to ensure that consequence management implemented, and that there would be no recurrence of such an irregularity. The conditions of the framework must be met. If not, they would not condone any irregularity until such time that all the conditions of the framework were adhered to.

What the OCPO was hoping to achieve when the new public procurement bill was promulgated, was to have all these loose pieces of legislation combined into one. They should have one public procurement law for the country. All these pieces of legislation would be reviewed, and those that needed to be repealed would be repealed. There were issues of transformation where the PFMA was not assisting, and chapter four of the public procurement bill made pronouncements that women would be empowered, as well as the youth and people living with disabilities. The regulations would be explicit on how these groups would be empowered.  OCPO viewed transformation very seriously, and the bill had been brought about to indicate their seriousness regarding ensuring that procurement was transformed.

The issue of 90/10 or 80/20 would be looked at seriously when they do the regulations that govern preference in terms of the point system and how they manage the different groups mentioned above, and how they were going to be supported and empowered. When they issue a tender, they issue it with different evaluation stages. First, they do the mandatory requirements and could exercise transformation in that space and indicate certain levels of black economic empowerment (BEE) or broad-based black economic empowerment (BBBEE).

There were no professional services in the transversal contracts in National Treasury, although they do encourage other organs of the state that require such contracts. There were quite a few professional services required in government, and putting them together at Treasury would be counterproductive. However, the Department of Justice had been requested to assist in putting together a panel for legal services.

Ms Basani Duiker, Chief Director, OCPO, referred to the point about whether sub-contracting was an effective way of developing small businesses, and said that based on the legislative environment, it was one of the effective ways for organs of the state to develop small businesses. Section 217(3) of the Constitution required that there must be national legislation that enabled the advancement of designated groups or people from previously disadvantaged backgrounds. What may be lacking in government in terms of making sure that this legislative enabler was used effectively, and that it worked, was making sure that whenever tenders were issued and where sub-contracting was feasible, this was followed through. Any bidder that failed to implement the commitment provided through the bidding process would be seen as misleading the state, and consequence management as a recourse would be taken by that organ of the state because that would be seen as undermining the legislative efforts to ensure that small businesses were developed.

Ms Mpho Nxumalo, Director: Policy Norms and Standards, commented on the legislative requirements and said that after the repeal of the PPPFA, there was chapter four of the Public Procurement Bill which provided for setting aside the awarding of bids to promote categories of businesses such as small, medium and micro enterprises (SMMEs), including local manufacturers. Furthermore, it was not limited to that, and makes reference to women-owned enterprises, because within the current legislation they were unable to set aside bids, and there were pre-qualification criteria for institutions, prior to going out on bids, that would state the opportunities for these designated groups.

The Chairperson had also referred to the 80/20 and the 90/10, where the 20 and the 10 was the status level of the contribution in terms of BBBEE. However, the 80 and the 90 portions do not look only at price, but also at the manner in which that supplier was being evaluated and would be able to respond to what was required by the institution – the competence of that supplier, as well as its functionality, was in that 80% or 90%. They were unable in the regulations to include any mechanisms because the 80 and 90 were enshrined in the Act. Once the bill was promulgated, the 80/20 would fall away, but the bill provides for the Minister to prescribe measures of evaluation that would be able to address the socio-economic issues of government.

There were challenges in the sub-contracting space because when major bidders bid, they indicate the sub-contractors, but once the implementation starts, if the sub-contractor gets left behind and excluded in the process, then that contract is cancelled.

As for the loss of economies of scale for organs of the state and not being part of the transversal term contracts, legislatively transversal term contracts were an option. The officials could decide whether they wanted to be part of them or not. However, with the new bill, the OCPO was looking to make it compulsory for certain commodities to be arranged as transversal contracts. They did not want to take over all the commodities from the organs of the state and centralise them at National Treasury, because they might erode their capacity. The idea was to look at the common goods and services that had similar specifications just to benefit from economies of scale, rather than taking over everything.

Chairperson's comments

The Chairperson said that these were serious issues that had not elicited satisfactory responses, especially around the issue of empowerment, sub-contracting and suppliers being paid on time. The issues raised here had been raised by the public, and there was no satisfaction even after all these years.  South Africa remained an unequal society with an over-concentration to people who had wealth prior to 1994. Being the biggest buyer of goods and services, government should be able to play a critical role in transforming the economy. Would it not be a good idea to hold these meetings with small businesses, women-owned and youth-owned businesses?

Could the conditions for deviations and modifications, as outlined in the presentation, be revisited? They come up with the law, and then there were supply chain management (SCM) policies that must be followed by companies, but once these companies get the contracts, they do not want to follow the SCM policies and run to the CPO for deviations and modifications. Deviations should not be a norm, and it should be under very peculiar circumstances that deviations were allowed.

Mr Fani responded that the OCPO took note that deviations should be an exception, not a norm. They did not favour any organ of the state when it comes to the application of the law and the regulations.

On transformational issues, the bill was explicit on how the state would give preference to the designated groups. What the bill was not indicating was the recipe for how that would happen, because the government may have changed programmes. They would be explicit in the Act, but in the regulations, they could be flexible on the percentages until they got it right.

The Chairperson said that the acting position of the CPO gives them a lot of uncertainty. It made it difficult to implement consequence management. The Committee puts a lot of trust in the OCPO to ensure that the resources of the state were properly used and that there were proper regulatory functions as far as procurement and SCM were concerned, and made sure that government transforms the economy using the tool of the budget. The issue of transformation remained at the core of the economy.

Committee minutes

The Committee considered and adopted draft Committee minutes of 8 February 2021.

The meeting was adjourned.