National Treasury SCM Instruction No. 03 of 2021/22 & implementation of Integrated Financial Management System; with Minister

Meeting report

Opening Remarks

The Chairperson said that the Committee was meeting to receive a briefing from National Treasury on the changes that had been made to National Treasury Instruction Note 3 of 2021/22, and the implementation of the Integrated Financial Management System (IFMS).

Mr Enoch Gondwana, Minister of Finance, thanked the Committee for affording the opportunity to the Treasury to present on Instruction Note 3 and the IFMS.

Mr Ismail Momoniat, Acting Director-General, National Treasury, said that the Office of the Chief Procurement Officer (OCPO) had a delegated authority, so when it came to mainly procurement issues, it tended to issue Instruction Notes without going through the Director-General’s or Minister’s office -- it was only with policy issues that those actors came in. At the moment, the OCPO had been established administratively, and there was now a law to establish it until the Public Procurement Bill was put into place.

The Chairperson said that physical meetings were necessary, as virtual meetings were not working, especially with load-shedding in place.

OCPO on replacement of Treasury Instruction Note

Ms Mendoe Ntswahlana, Chief Procurement Officer, National Treasury, took the Committee through the presentation, explaining the reasons for replacing Instruction Note No. Three of 2016/17. These reasons included:

1. To enhance transparency and accommodate the recommendations of the Zondo Commission of enquiry into state capture;
2. To improve the turnaround time in decision-making and to expedite service delivery;
3. To provide expanded measures to restrict suppliers from doing business with the state on the basis other than fraudulent claims of preference points;
4. To provide for the restriction of a person or supplier from doing business with the state in terms of the Public Finance Management Act (PFMA); and
5. To provide measures for restricting and debarring employees of the state from doing business with the government.

She said that during the review process, National Treasury had identified a number of inconsistencies in the broader public procurement regulatory framework, and there was an expectation that the procurement prescripts should resolve these inconsistencies. On the deviations from the normal bidding process and expansions and variations, the new Instruction provided for monthly reporting on procurement by other means (deviations) to the relevant treasuries and the Auditor-General of South Africa (AGSA). Moreover, a provision had been introduced in the Instruction to further provide for reporting in the institution’s annual report where deviations from the competitive process had taken place. It thus elevated transparency and reduced any level of obscurity.

She said that the new Instruction changed how deviations and variations were processed and approved. The presentation noted an overall shift in the transaction total amount between the 2016/2017 Instruction Note and the 2021/2022 Instruction Note (from R5.5 billion to R248 million).

Ms Ntswahlana said that this was probably due to institutions not reporting deviations as per the new Instruction Note. To counteract this, the OCPO instituted a process of writing to institutions that featured in the top 20 deviations of the previous Instruction Note, but no longer featured under the new Instruction Note.

Discussion

Mr S Somyo (ANC) said the President spoke about the bottleneck in National Treasury and noted that the new Instruction Note was developed as a response. He said that there was a very frightening situation in terms of procurement, as evident in the presentations given by Eskom previously. Matters of vetting were not being finalised, which was critical in the procurement realm. He asked what could be done in this regard, and how the new Instruction Note could assist. He said that more investigation needed to be done into the numbers as it currently seemed to indicate the new Instruction Note had not been used appropriately.

The report from the Auditor-General (AG) indicated that the state stood to lose around R12 billion in procurement matters. This raised concerns over accountability regarding the implementation of the Instruction Note. How did the OCPO plan to keep institutions accountable in real time, going forward? It was good to have a plan, but it was only with the implementation of that plan that a difference would be made in improving service delivery. Was there a way to create a link between the required performance standard and the real time outputs? He said that National Treasury must give institutions the Note and the accountability agreements that went with the Note. It was good to give departments liberty to fast-track service delivery, but National Treasury must also ensure that a standard was maintained.

The Chairperson said that the Instruction Note gave a level of assurance, with built-in checks and balances. He took comfort in knowing that the right questions were being asked when there was an abundance of requests. On the new Instruction Note, he said that the reasoning was advanced and it looked good, but as a practical matter, it seemed susceptible to other things and was perhaps even impractical. He said that the Committee had maintained that expansions and deviations should not be the norm, and that they must be used only in the most extraordinary circumstances.

Ms A Beukes (ANC) recalled that one of the reasons for the update to the Instruction Note was to enhance transparency. On slide 12, points four and five, the presentation stated that National Treasury had developed the compliance reporting framework to enhance transparency. Did that mean the Instruction Note of 2021 was not effective? Why was there a need to develop a new reporting framework? On the interventions that required National Treasury to reach out to certain institutions, what were the turnaround times for this communication? She said that this was not aggressive enough. Was there a tool in National Treasury to measure the impact of the Instruction Note?

Responses

Minister Godongwana said four things determined how National Treasury handled procurement matters. The first thing was the constitution, which stated that organs of states each had their own procurement teams. It further stated that National Treasury needed to develop a framework in which that happened. The responsibility therefore lay with the organs of state and, as declared by the Constitutional Court earlier in 2022, National Treasury was encroaching on these responsibilities with regulations. National Treasury must therefore only set the standards and monitor them.

He agreed with Mr Somyo on the frightening state of procurement in organisations such as Eskom, where four syndicates were operating within the system, which posed many challenges. He reiterated that the context in which National Treasury operated was set out in law, and it had to function within these bounds. He said that the level and the pace of digitisation in the government would allow the Department to do real time monitoring soon

Ms Ntswahlana said there was a need for the Instruction Note as there was a gap, as shown in the presentation, and this new Instruction Note was attempting to close that gap. Accountability rested with the institutions, so the question was rather how Treasury would support institutions on accountability. This was what the framework would do.

She noted the questions regarding the reporting timeframe. She agreed that a faster turnaround was needed for Treasury to give assistance in time -- when a problem arose, and not only when reports were received on a monthly or quarterly basis.

On the measurement of the efficacy of the Instruction Note, she said there was a unit for monitoring and compliance. The Note would assist in changing the approach in working with the entities, so the new challenges to monitoring were being identified.

She took note of the need for checks and balances. The OCPO wanted to rely on a working arrangement and not focus only on issues of correspondence.

Treasury was not satisfied with the usefulness of the Note, as it was evident that things were going downhill. However, the OCPO was investigating the causes of this backsliding, and it was engaging with the institutions and entities on this.

She said that the framework being developed would aim to get National Treasury involved in what institutions were reporting on, as the previous Instruction Note had delays, so this was a measure to try and counteract that.

On accountability, she asked at what point there would be accountability at all levels. How would delivery be fast tracked without compromising internal control? The OCPO wished to collaborate with the institutions’ internal control assurers and other internal organisations in solving these issues and implementing this Note.

Minister Godongwana said he would table all of the Section 32 reports in Cabinet to ensure that his colleagues had read the documents.

Mr Momoniat said that, on the one hand, National Treasury wanted a procurement process that was easy for SOEs and accounting officers that were acting in good faith, but on the other hand, it was evident from the Zondo Commission that there was a lot of corruption and looting around procurement. The Department was now looking at how to deal with the recommendations of the Zondo Commission. History has also shown that just because one had a good law did not mean one would have a good outcome, so the challenge with procurement was to go back to what the PFMA said and let managers manage while keeping them accountable. Unfortunately, Treasury was also not omniscient, so although monitoring systems could reduce the scope of obvious corruption, it would not be able to eradicate it completely. It was also important to look at how problems had been dealt with. What did the chair of the audit committee do? What did the internal control systems do? How did the process work? How did the Treasury respond? Treasury must then ask how it could have intervened.

He said the question that needed to be asked was what the role of National Treasury and the OCPO was, and how these actors could reduce the risk so that procurement budgets were not plundered, resulting in there being no value for the state. There were a number of objectives, such as value for money, empowerment and local development. The overarching question here was how to make it easy for those acting in good faith, and harder for those acting in bad faith. Treasury could engage more with the Committee on these questions once the Public Procurement Bill was in place. The law itself could not make changes, it was how the law was implemented that would make changes.

He said that when looking at the grey-listing report, it was said that South Africa's laws were too naïve and not coordinated enough. He asked how they could make the system work better. How could they modernise the system to reduce the risk of looting and corruption that one saw around procurement? These were the questions that needed to be engaged on. He suggested that once the Procurement Bill was in place, the Committee and Treasury should meet again to have a workshop to engage on some of these issues.

Mr Somyo said that procurement was a huge area that could turn things around, but just as much had a negative impact. He pointed out how heavily regulated the government space was, yet many of those regulations were ineffective. He asked how vetting impacted the ability of the state to do what was right. He emphasised the importance of vetting and ensuring that the abuse of power was acted on.

The Chairperson said that expansions and deviations had become a runaway train -- a coping mechanism for poor contract management. It even bypassed competitive bidding processes. He questioned whether these institutions and entities that had performed these serious offences would somehow self-regulate. The intention to award a tender was published so that complaints and disputes could be logged but now, because of some internal system, it has become part and parcel of those processes. This created a culture of evergreen contracts in some spaces.

He urged the OCPO to go back and assess the effectiveness of the Instruction Note. A monthly publication on expansions and deviations needed to indicate why these deviations had taken place. This was just one action step in an SCM reality, but its consequences were far-reaching. He said the Committee had been briefed on the four syndicates in Eskom by the Special Investigating Unit (SIU), and mentioned the example of the 700 trucks transporting coal to the coal mine. He agreed that a workshop with National Treasury would be useful.

He called for a reassessment of Instruction Note Three, and stressed that the mechanisms for effectiveness and efficiency needed to be strengthened.

Implementation of IFMS

Historical background

The Chairperson said that the Integrated Financial Management System (IFMS) matter appeared in the legacy report. It had been served before the SCOPA and Parliament five times and the Standing Committee on Appropriations twice. The IFMS was a 2005 Cabinet decision but had still not reached a logical implementation conclusion. This illustrated the lethargic nature of government's adaptation to digitisation. He commented that the level of dysfunction that the State Information Technology Agency (SITA) had reached was shocking.

Minister Godongwana said that in 2021/2022, the police department had underspent by R4 billion. The Justice, Crime Prevention and Security Cluster (JCSP) had been working since 2007 on an integrated justice system. When questioned on why it took so long, the JCSP requested that SITA and the Minister also account for the delay in this regard. This showed the difficulty with projects involving a number of departments. He had requested a meeting with SITA and the Department of Communications and Digital Technologies (DCDT), and both parties had seemed uninterested in IFMS, which made executing the task very difficult.

Mr Momoniat said that this project had been on the drawing board since before 1994. The talk was initially that software specialists from India would design a custom system for South Africa. After a 20-year wait, a decision was made in 2014 that the system did not work. The members from National Treasury who were present in this meeting would actually be answering for decisions made long before their time in Treasury. At this stage, he would just like to see the system implemented, and this presentation would enlighten the Committee about some of the challenges that Treasury faced in this regard.

IFMS implementation challenges

Ms Dikeledi Lebea, Chief Director, National Treasury (NT), and Ms Laura Mseme, Acting Chief Operating Officer (ACOO), NT, made the IFMS presentation to the Committee.

National Treasury currently maintains four legacy systems:

• The Personnel Salary System (PERSAL);
• The Basic Accounting System (BAS);
• The Logistical Information System (LOGIS); and
• Vulindlela.

These systems posed a number of challenges due to the aged suite of the technology. Limited resources and skills were available to support and maintain these systems, which were also inflexible and cost a lot to maintain.

The objective of the IFMS was to replace legacy systems with a modernised integrated financial management system. The IFMS would ultimately contribute to minimising irregular expenditure and fraud, improve accountability, consolidate and monitor spending, and create the potential for improved audit outcomes.

The programme stakeholders included the National Treasury, the Department of Public Service and Administration (DPSA), the Department of Communications and Digital Technologies (DCDT) and SITA.

The main factors delaying the implementation of IFMS were:

• Audit committee oversight of the forensic investigation (2016-2018);
• Gupta ANN7 attack on Treasury in May 2017;
• External investigations by the Hawks, the SIU, the Zondo Commission and the Public Protector;
• Delays in procurement;
• Governance arrangements and decision making; and
• Classification of fruitless and wasteful expenditure by the AGSA since 2016.

The unsuccessful procurement presented further challenges to SITA, and there were delays in establishing the IFMS technology support and maintenance environment.

The presentation indicated that Phases 1 and 2A had been completed, and phases 2B and 2C were in progress. Phase Three would be the national rollout.

It was concluded that the IFMS implementation remained necessary and urgent, and the financial management system within national and provincial government needed to be modernised. To date, there had not been evidence of any money being spent inappropriately, despite the many investigations.

Mr Momoniat recalled the first attack by the Gupta media in 2017 which had sparked some of the investigations, and said that there was no other choice but for government to implement the IFMS system. Maintaining the old system over implementing the new system was, in some ways, not responsible expenditure. There was a clear need to modernise government systems, which included e-procurement within national and provincial government. He reiterated that, to date, there had not been any money spent inappropriately, despite contestation over some irregular or fruitless expenditure. He said that National Treasury was working on renegotiating the ORACLE contract to deal with the concerns raised by the Auditor-General, and to update the system. Implementation depended on a number of partners, but the spending accountability lay solely with National Treasury, so when there was an adverse audit outcome it fell on only one department. He said that this was perhaps an area that needed to be reevaluated.

Minister Godongwana said that SITA had been tasked to procure a service provider to execute the work in the next phase of the programme, but until that was done, an exemption needed to be granted, otherwise Treasury could not move forward. If National Treasury were to procure a service provider, it would breach SITA law.

Discussion

The Chairperson asked whether this would not be a deviation. He said that this was a very serious and complex issue and that a way forward needed to be discussed.

The Minister said that a joint meeting needed to be arranged with the DPSA and the DCDT as a starting point, but ultimately a decision needs to be taken.

Mr Somyo said that it was not a financial issue, but a project management issue, causing a loss in money due to a failure to manage the project appropriately. The issue was not wasteful and fruitless expenditure -- it was because National Treasury had a project and failed to realise it. He recognised the failures of SITA, and said Treasury should perhaps find a service provider. The presenters had indicated that the challenge of this project was the multiplicity of role players, and he agreed that Treasury was only the lead in this project, and was carrying the burden.

What was the timeline in terms of years and months to realise the goals of this project? What did the project plan look like? He suggested that the Minister should get other ministers to assist Treasury in getting this project done, and said that Treasury should not fight a battle with the AGSA, as that battle was neither here nor there.

Mr A Lees (DA) asked when the DPSA and DCDT meeting was set for. If a date had not been set, it should be raised in the next Cabinet meeting, as the more one delayed, the more it would cost. If Treasury were to procure independently of SITA, was it ready to do so? Had Treasury canvassed the market? Was everything ready -- could a tender process take place in January to appoint the service provider? He agreed with Mr Somyo, and said that if the Minister of Communications did not want to engage on this matter, it should be taken to the Cabinet at the next meeting. They should get the Minister of Communications to sign off on whatever needed to be done to procure directly. He said that this meeting had to happen by the end of November. The cost was already in the billions. If Cabinet did not want to support Treasury and they entered into irregular expenditure, he suggested that the Committee should not take too strong a position regarding that expenditure.

The Chairperson said that Cabinet takes decisions, which form a part of annual performance plans (APPs), the Budgetary Review and Recommendations Report (BRRR) process and the overall budget, which was the basis on which the government was held accountable. There was now an unnecessary tug of war about vetting -- a 2014 Cabinet resolution -- as it was not happening. It was not the Committee’s decision, but it was supported through oversight and accountability. There were now hundreds of people that needed to be vetted and had not been vetted, and many positions were open for this reason. The same was the case with the IFMS -- it was a decision by Cabinet, and it should now be raised again in Cabinet. He added that SITA was not fit for purpose and was a risk to national security. The financial year would close in five months, and this would still be a problem then.

Responses

Minister Godongwana said that the meeting was supposed to take place on 21 November, but would now take place within the next week, after which the Minister would go to Cabinet and brief it on the progress. Financial management was the terrain of National Treasury, and Treasury should not be forced to partner with anybody, including in areas of digitisation and financial management, but the situation was now that Treasury needed to work with the DCDT.

Ms Mseme said that the IFMS figured prominently in all of the plans. The Chief Director of the IFMS had a plan in terms of service delivery. There was a particular IFMS plan that was in the operational plan of the division, in the APP, and in the medium term strategic framework (MTSF). In all of those, there were targets and deadlines and dates. She said that they had consistently indicated underperformance since 2016 on all of those indicators. The national rollout was set for 2024, and with the current interventions from the Minister and acting DG, this goal seemed to be achievable. Treasury was ready regarding the design, schedule and request for information (RFI). Once these risks were managed, they would be able to move forward quickly.

The Chairperson said that Treasury was bearing the brutal brunt of this project. If it went wrong, they were the ones that looked bad, but when it went right, everyone else would get the kudos. He would like a confirmed date for the meeting, and he would communicate with Cabinet Members to say that the matter had been presented to the Committee. The Committee’s position was that Cabinet’s decision must be dealt with. The meeting must convene within 14 days. The Committee then wanted monthly reports. Cabinet must arrive at a position regarding this matter in 90 days -- by the end of February. Parliament wanted this matter resolved.

When the Committee returned from the yearend break, the first order of business was to get SITA before the Committee, as there was a long list of SITA casualties, such as the Post Office, SAPS and Home Affairs. The Committee must advise the Portfolio Committee on Communications and Digital Technologies that SCOPA had observed the trend of SITA being a financial risk.

Mr Somyo agreed with Mr Lees on the engagements with the AGSA, and said that the on-and-off engagements were a waste of time. The Committee’s leniency on the matter would be in appreciation of the efforts of the Minister to take this matter forward. The Committee would support Treasury in engaging directly with all the actors that would enable this project to go forward. Failing to be accountable for this, the acting DG would be held liable.

The Chairperson said the dispute between the Minister and the AG was a distraction from the broader problem, which was this historic issue. The way out was implementation. He acknowledged the right of Treasury to raise a dispute with the Auditor General, but he asked that they focus on the bigger issue, which was the IFMS, and for these investigations to be concluded.

He thanked the Minister for the meeting and for the compliance and cooperation from National Treasury, as it enabled the work that the Committee did.

The Minister thanked the Committee for the manner in which the discussion had taken place. He said the dispute with the Auditor-General involved a reputational risk for National Treasury, but they would take note of the advice of the Committee.

The meeting was adjourned.