Chief Procurement Officer on Requests for contract deviations and expansions in Quarter 1 2022/23

Meeting report

Opening Remarks

The Chairperson said the Committee would be briefed by the Office of the Chief Procurement Officer (OCPO) on the requests for contract deviations and expansions during the first quarter expenditure report for the 2022/23 financial year. The Committee would also adopt the minutes of 24 and 26 August. 

Chief Procurement Officer on contract deviations and expansions

Ms Mendoe Ntswahlana, Chief Procurement Officer (CPO), National Treasury (NT), said that the presentation would have three parts in line with what had been requested.

The first section was transversal contracting, which would be covered by Mr Mothushi Moifo, Acting Chief Director: Transversal Contracting, NT.

Ms Basani Duiker, Chief Director: Supply Chain Management (SCM), Monitoring and Compliance, NT, would deal with the details of the largest deviations approved, including the reasons for the deviations and the profiles of the companies that had benefited from such deviations.

Mr Willie Mathebula, Chief Director: Contract Management, NT, would cover the manner in which procurement was used to help with the implementation of the South African Economic Reconstruction and Recovery plan.

Transversal contracting

Mr Moifo outlined the benefits of transversal contracting as:

• The standardisation of state requirements.
• The benefits of economies of scale.
• The reduction of the duplication of procurement efforts.

The role of transversal contracting within the OCPO functional structure was to:

• Facilitate and manage transversal contracts on behalf of the state.
• Identify commodities for facilitation.
• Negotiate bulk procurement prices.
• Leverage economies of scale.
• Supplier management.

There were 60 commodities that were managed as a part of transversal contracts, health and fleet management being the two largest. Vehicles and fleet vehicle management were the top two commodities by value.

The challenges and risks include:

• Late participation requests.
• Lack of an integrated reporting system.
• Inconsistent budget commitments.
• Late payments.
• Lack of participation support.

Deviations

Ms Duiker covered the SCM legislative framework and the Public Finance Management Act (PFMA) SCM instruction note of 2021/2022, and compared it to the prescripts of the 2016/2017 instruction note.

In the first quarter of 2022, the total sum of deviations within the 40 government institutions that applied was R250 276 087. The total of 23 government institutions that applied for contract modifications or expansions in the first quarter was R285 669 039.

The third section of Ms Duiker's presentation discussed the OCPO analysis of reports and the implementation of subsequent support plans and effective monitoring.

Finally, the presentation discussed the supplier profiles regarding black ownership, women's ownership and youth ownership.

Procurement

Mr Mathebula provided a status update on the draft of the draft Preferential Procurement Regulations 2022 and the process that had been followed since the Constitutional Court judgment. The draft regulations were currently going through a vetting process following comments from the public. Implementation was planned for January 2023. He also discussed the progress and next steps for the Public Procurement Bill.

Discussion

Mr Z Mlenzana (ANC) asked what the perceived disadvantages of transversal contracts were. Was there an element of reluctance from some state organs? If there was reluctance, what could be some of the reasons for it? On deviations, was there some form of risk management within the office? Was the OCPO able to pick up artificial conditions for emergency situations or urgent cases, and if so, how? How do they deal with perpetual offenders? Regarding the implementation, was there no malicious compliance, where parties did whatever in whichever way, knowing there was this 'side room' they could use? On balance, how large was the amount of deviations that were not applied for or approved and implemented regardless, compared to the deviations that followed the appropriate route?

Mr A Sarupen (DA) said had been seen from the State Information Technology Agency (SITA) experience, that transversal contracts often locked departments into solutions that were later found to be unsuitable and caused all sorts of problems. What was the rationale behind pushing transversal contracts in this presentation, and why did the OCPO seem to think it was a good thing when it had been abused, particularly at the municipal level, where municipalities piggybacked off of each other's contracts to allow for single corrupt contracts to spread across multiple municipalities?

What due diligence did National Treasury do when receiving deviations, particularly in respect of the companies that would benefit from these deviations, to ensure that there was no corrupt intent? Had they ever found an attempt at corruption, and if so, what remedial action had been taken? What remedial actions were taken if the department was granted deviations from conditions but did not comply with the conditions?

Mr O Mathafa (ANC) asked about the conditions granted for deviations. This question was motivated by the developments in the City of Tshwane, where the mayor had said that comments should be sought from Treasury. Once it had given the conditions or comments, the City could decide whether or not to comply. The question was therefore, if this was accurate, and if so, what was the purpose of giving conditions that were not binding? Treasury remained the ultimate custodian, and their remarks should have a binding effect.

As much as slide 10 was helpful, it compared the top 20 of the 2020/21 financial year to the top 10 in the 2022/23 financial year so it was difficult to conclude from this. According to the comparison, was there an improvement between these two timeframes?

On slides 73, 74 and 75, which deal with state procurement, were strict measures put in place to identify and determine the degree of fronting practices? It had always been a bone of contention that as much as government had good intentions of empowering and uplifting certain sectors of society, the control and ownership were still held by those who had been previously advantaged in society.

According to slide 24, women constitute only 6% of participation in state procurement processes, indicating the slow pace of women's empowerment in the country, despite it being a clear government commitment. The President had indicated that the state, being the biggest spender, should ensure that women were empowered and lifted out of economic exclusion. Once they were deep in that particular space, they became vulnerable to society and their own space, and gender-based violence (GBV) issues became acceptable, given their vulnerable state. How could the office support this campaign to ensure women participate in procurement? This was not only the case at the national level -- a report from one of the municipalities in Gauteng indicated that women accounted for only 4% of procurement in some categories. That was a point of concern and needed to be corrected.

The Chairperson said the effects of apartheid were felt most harshly by black women. When talking about the emancipation of women, it could not be done without dealing with their economic situation. The government needed to be at the forefront of doing that, so the OCPO and National Treasury needed to formulate a focused approach to ensure that women were economically uplifted. The figures that had been shared were very disappointing -- the oppression of women needed to be dealt with.

He asked how closely the CPO worked with the Broad-Based Black Economic Empowerment (B-BBEE) Commission for National Treasury. What strides was the country making in using public procurement to deal with the legacy of economic exclusion of the majority of the people of this country? Was the suggestion that the powers of the Minister were not supported by the legislation an accurate one? How were the regulations that were coming up going to address this? The Public Procurement Bill should be unequivocal and clear about using public procurement to deal with economic exclusion.

It had been three decades since 1994, and there was legislation such as the Preferential Procurement Policy Framework Act (PPPFA) in place that had the 80/20 rule and 90/10 rule, yet black people were still on the margins of the economy. The Committee had approved budgets of R2.157 trillion this year, and the Medium Term Expenditure Framework (MTEF) was about R6.6 trillion, but it was clear that apart from social goods, black businesses were not benefiting from this. Therefore, the Bill that would come before Parliament should be unequivocal about the desire of this government to use public procurement to deal with the legacy of economic exclusion.

Related to this, public procurement had been identified as an important lever to achieve localisation, economic transformation and enterprise resource planning (ERP) in general -- how did the OCPO see its role in this regard? Which departments should pioneer and lead localisation, economic transformation and ERP, and why did those departments have a better potential to lead? What was the downside of central procurement, if any? What was the involvement of B-BBEE in the top four commodities? How was this used to promote the involvement of township and rural entrepreneurs?

Was it not concerning that one company would procure goods and services to the value of R1.6 billion, deviating from the normal SCM policies? For many years, Eskom had been the biggest contributor to deviations. Should deviations not rather be an exception than the rule for companies? It was concerning that some companies disregard all the established SCM rules and decide to procure goods and services without following the SCM rules and the laws that this Parliament passed. One year there had been about R36 billion in deviations, and about R32 billion had come from Eskom. What was the biggest risk with these deviations, particularly concerning the second instruction note, as shared by Ms Duiker?

Responses

Ms Ntswahlana referred to the issues related to the current instruction note of 2021/22 and the previous instruction note. The PFMA envisaged that managers rarely manage the accounting officers. In the past, with the previous instruction note of 2016/17 and the current instruction note, it was only now that they were giving that power to the institutions. There could be risks, and those risks were emanating from reporting; hence the top 20 and top 10 were included in the report. Treasury also had robust systems to provide support, and there were conversations within Treasury on having a robust support plan that would be able to support the various institutions.

The second point was around the perceived disadvantages. There were perceived disadvantages, but it was a case of the lesser of two evils in some situations. The issue was that transversal contracts were more beneficial in terms of economies of scale. When the transversal contracts were done, the various entities or departments formed part of the committee in many instances. At the moment, transversal contracts were not mandatory, but institutions were able to compare. What was quite important when dealing with issues relating to transversal contracting was the market should be scanned to compare pricing.

There were therefore, benefits and perceived disadvantages, the latter being the desire for the procurement to take place internally at the particular entity, but the advantages of transversal contracting outweighed that approach. In many instances, state organisations had their transversal contract for some commodities. The second issue was that state institutions may be reluctant, as they had their own system that they were working on. It was vital to look at the transversal contracts that various organisations were using to discuss issues related to pricing and other elements, as they would be able to get many departments on to transversal contracts.

The deviations from SCM policies were concerning, but there were frameworks for deviations and the circumstances allowing them. The OCPO would have engagements with the organisations regarding the deviations to check if the entities were following the guidelines, and to support the organisations where necessary.

Ms Duiker responded on transversal contracting and Mr Sarupen's point regarding the use of these contracts by municipalities to piggyback off corrupt contracts, and said it was important to understand the difference between the transversal contracting space and the process that needed to be followed compared to piggybacking. When transversal contracts were implemented, the organs of state, prior to the tender, had been invited to opt into the transversal contract so when the tender was implemented, it was known which organs of state had opted into the transversal contract -- it was not an afterthought.

She confirmed that there were compliance issues evident in the comparison of this year and the last financial year. The issue seemed to be the non-compliance with the timelines prescribed by the instruction note, because some organs of state, especially the state-owned entities (SOEs), found the timelines challenging. The larger SOEs had a number of divisions to consolidate, so the 14 days may not be practical. Solutions to this issue were being investigated.

She added to what the CPO had said about identifying instances of abuse and potential corruption. In the old instruction note, where the OCPO had given conditional or provisional support, and the organs of state did not comply with the conditions, the Auditor-General (AG) would audit the deviations and contract modifications. This audit was not done on a sample basis -- the entire population was edited. In cases where there were conditions, the Auditor-General required accounting officers to demonstrate compliance with those conditions. Where they had not been complied with, approval from National Treasury would not be granted and the structure would be deemed non-compliant. In this case, the irregular expenditure framework would need to be followed, which had a set of strict repercussions.

Regarding the biggest risk for deviations and contract modifications for the new instruction note, she said deviations and contract modifications were not the norm, and were supposed to be utilised only in exceptional circumstances. In the current instruction note, accounting officers were required to make an upfront determination of what the procurement by deviation methods their policy must adopt were, and the accounting officers were required to adopt the circumstances within which those deviations and contract modifications could be applied. In procurement planning and demand planning, organs of state also had to do adequate market research to understand the market and approach it appropriately, and avoid the use of deviations to fix failures to plan and perform.

She referred to the City of Tshwane issue, and said Section 113 of the Municipal Finance Management Act (MFMA) prescribes how a municipality must deal with an unsolicited bid. Regulation 37 prescribes the framework within which these unsolicited bids were implemented. It also provides the conditions within which unsolicited bids should be considered and the process that must be followed. It requires the municipality to publish the decision to consider an unsolicited bid and to get comments from the public. After getting comments from the public, a submission must be made to National Treasury. Unfortunately, the framework required the municipality only to consider National Treasury and the Auditor-General's comments in decision making. National Treasury did not have the powers to enforce the municipality, however. It remained the responsibility of the accounting authorities and accounting officers to account for their actions so far as accepting or rejecting the comments provided by National Treasury.

Mr Moifo said the advantages of transversal contracts far outweighed the disadvantages, but some challenges may arise, such as over-centralisation. This was done by taking all strategic commodities and putting them in one place, so over a period of time, organs of state might not get the opportunity to be involved in the procurement, which may erode the capacity of organs of state as far as procurement was concerned. Another challenge that may arise from centralised contracts was that, should challenges arise where these contracts were arranged, those challenges would, to some extent, impact multiple organs of state.

On the reasons of organs of state for being reluctant to be a part of transversal contracts, she said some institutions would like to do their own procurement processes, especially provincial departments, where they were of the opinion that because the contracts were arranged at a national level, local suppliers did not get a chance to win those contracts.

There was a difference between the arrangement of transversal term contracts and piggybacking. The arrangement of transversal term contracts was that when the OCPO went out to the market, specific organs of state had indicated an interest in that particular contract, whereas piggybacking referred to where an organ of state finds another contract that was arranged by another organ of state. With the SITA transversal contract, there were commodities that were regarded as transversal that National Treasury arranged, and there were other commodities that were Information and Communications Technology (ICT) related, and were arranged by SITA. What National Treasury and SITA did should be seen differently. As Ms Duiker had explained, piggybacking was different to transversal term contracts.

Mr Mathebula added that the rationale for transversal contracts was based on the strategic nature of specific commodities to achieve the government's socio-economic objectives. The commodities must be cross-cutting in nature to consolidate the volumes and derive economic benefits out of the economies of scale. These were some of the justifications for having transversal contracts. Looking at the perceived disadvantages, one of them would be the issue of over-concentration, especially when comparing provinces. There were rural, urban, and semi-urban provinces, and these provinces might want to advance local economic development. Another perceived disadvantage was the possibility of creating monopolistic or oligopolistic practices in the market.

The measures in regulation 32 in the MFMA, which was applicable to local government, were exactly meant to manage the risk of institutions abusing the SCM system by simply adding on an existing contract when the contract had been arranged for another particular entity.

He said the issue of fronting fell squarely within the purview of the B-BBEE Commission. Where fronting was found to have taken place, the Commission should take the necessary steps to deal with it. Of course, it did not exonerate the involvement of the National Treasury for support where fronting was observed. It was a serious issue in the country that defeated the whole agenda of actual transformation. There should be a stronger collaboration between the Treasury and the B-BBEE Commission, which is currently sitting under the wings of the Department of Trade, Industry and Competition (DTIC).

Mr Mathebula acknowledged that National Treasury needed to ensure that the Bill considered issues of empowerment, especially regarding women. Chapter 4 of the Bill dealt with preferential procurement, and several provisions stated that the framework that must be developed through this Bill must look after women, youth and people with disabilities, as well as job creation. These chapters in the Bill would be unpacked, and National Treasury would do whatever it took to ensure that these particular issues were addressed.

In the drive for issues of transformation, it may have been overlooked that the provisions made in the 2017 regulations could have been ultra vires, such as issues involving industrial procurement, sub-contracting and transformation. Given that the offending provisions had been removed, as per the court decisions, and given that the Bill was not finalised yet, an instrument needed to be found through National Treasury and the relevant policy departments to ensure that issues of localisation, local economic development and empowerment through sub-contracting were seen to in the procurement process. Until the Bill was finalised, these issues could not be ignored. OCPO would engage with the DTIC on this matter.

Responding to the question as to which departments should play a role, he said all departments should.

Ms Ntswahlana added to the issue of deviations, saying that the current instruction note was not very different from the one before. However, the difference was that the accounting officers report after the event on all deviations, and not only for emergency and urgent cases. In this way, the OCPO played more of a supportive role that assists in identifying trends which the accounting officer and accounting authorities in the institutions need to deal with. The regulatory framework aimed to give this power to the managers. There were systems within the institutions to deal with issues such as deviations -- but were they active in curbing such transgressions? As mentioned previously, the OCPO had received some of the reports from institutions, but there were instances where the reports were not received. It was not for the OCPO to say whether an entity had submitted, but rather to support entities to submit. The strategy could not only be responsive -- it needed to be proactive.

The Chairperson asked the OCPO if one of its responsibilities was to advise the Minister on procurement-related issues.

Ms Ntswahlana agreed with the Chairperson.

The Chairperson said that he was not a big fan of sub-contracting, as government gave its power to big companies to sub-contract. Why did the government not directly give 30%, for instance, to a black company or women-owned company, rather than outsourcing that power to another entity? On the question of which departments should play a role, he said it should be the big spenders, as their impact would be large.

He asked why Energy Recovery Ventilation (ERV) products were still being imported, as they were needed in both the private and public sectors, so there was an opportunity to build a factory and stimulate the local economy. The same applied to stationery -- why was it being imported from India when it could be used to stimulate the South African economy and create jobs? It was important that the OCPO, which was at the forefront, advise the Minister on such cases. The train factory that was established in Ekurhuleni was achieved by using procurement to establish the donor, and now there was the possibility of South Africa exporting trains to other countries. This was an example of job creation and black empowerment through procurement; there should be more of this. There was certainly the opportunity and need for it. It was necessary to be very deliberate, as a R2 trillion budget could not be approved year in and year out without back people, women, young people and township economies benefiting from it.

Ms Ntswahlana agreed with the Chairperson. The OCPO would have a report and discussion around all of these issues when appearing before the Committee again. These were also issues that would be dealt with in the Bill.

Committee matters

The Committee considered and adopted the minutes of 24 and 26 August.

The Committee Secretary reminded the Committee of the meeting on 2 September with the South African Defence Force, National Treasury and the Department of Public Works and Infrastructure as a follow-up to the oversight visit in April.

The meeting was adjourned