Expenditure Patterns & Deviations and expansions Q3 2022/23: National Treasury Office & Chief Procurement Officer briefing

Meeting report

Office of the Chief Procurement Officer (OCPO) on 2022/23 3rd quarter requests for contract expansions and deviations

Mr Mothushi Moifo, Acting Chief Director (CD): Transversal Contracting, OCPO, said that the presentation would have three parts, in line with what had been requested. He would present an update on transversal contracting. 

The second section, on the role of procurement in implementing the South African economic reconstruction and recovery plan (ERRP), would be covered by Mr Willie Mathebula, CD: Contract Management, OCPO. 

Dr Sakhile Manyathi, Acting CD: Supply Chain Management (SCM) Governance, Compliance and Monitoring, OCPO, would deal with the details of third quarter deviations and contract modifications. 

Transversal contracting mandate

Transversal contracting (TC) was responsible for facilitating and managing transversal term contracts on behalf of the government.

The mandate by Treasury regulations (16A6.5) provides that the accounting officer or accounting authority may opt to participate in transversal term contracts facilitated by the relevant treasury.

Should the accounting officer or accounting authority opt to participate in a transversal contract facilitated by the relevant treasury, the accounting officer or accounting authority may refrain from soliciting bids for the same or similar product or service during the tenure of the transversal term contract. 

There was an optional provision to be part of transversal term contracts. The relevant treasuries operated nationally and provincially. 

The benefits:

• Standardisation or consolidation of state requirements - common products and similar specifications and pricing;
• Benefit from economies of scale - high volumes; 
• Reduced duplication of procurement efforts - the single centre of procurement.

The OCPO was a distinctive division within National Treasury, headed by the Chief Procurement Officer (CPO). The functional structure was organised into six units, each headed by a chief director.

The challenges and risks:

• Late participation requests - post-award;
• Lack of an integrated reporting system;
• Inconsistent budget commitments – over and under-spending;
• Late payments;
• Lack of participation support - education portfolio. 

The opportunities were to expand current transversal spending. There were new requests for transversal contracts. These included auditing, recalibration and reconfiguration of smart electricity meters, and the air quality management system.  

Implementation of ERRP

The Preferential Procurement Regulations, 2022, were promulgated on 4 November 2022, and became effective on 16 January 2023.

However, some sectors of society were concerned that National Treasury should have prescribed localisation as a mandatory requirement in the preferential policies of state organs. There was a concern that leaving it to the discretion of state organs may severely impact job creation.

The new regulations empower state organs to develop their preferential policies and implement them within the framework prescribed by the Preferential Procurement Policy Framework Act.

Organs of state were required to identify specific goals from the Act and the Reconstruction and Development Programme (RDP) framework of 1994 to be included in their policies and invitations to submit tenders.

There was a range of specific goals that organs of state could choose from which may include local industrialisation, among others.

Section 10 (1)(b) of the Broad-based Black Economic Empowerment (B-BBEE) Act required organs of state to implement broad-based economic empowerment when developing their preferential procurement policies.

National Treasury had been rolling out the regulations to organs of state to ensure that developed policies were in keeping with the regulations. It continued to provide technical support and clarification of the regulations.

The devolution of powers to state organs would likely improve the turnaround time in service delivery.

However, it should be noted that the primary legislation informing these regulations had limitations, especially in that, among others, the 80/20 and 90/10 preference systems were prescribed in the Act itself. They could be changed only through regulations if the Act was amended or repealed.

Update on Public Procurement Bill

The public had been raising concerns that this piece of legislation did not adequately address the transformation agenda and black economic empowerment in particular, and that there were too many overlapping pieces of legislation on procurement that sometimes contradicted one another.

Against this background, the Public Procurement Bill had been developed to serve as the single national overarching procurement regulatory framework in South Africa. The Bill aimed to consolidate the various pieces of procurement legislation into a single overarching procurement regulatory framework in South Africa, and eliminate fragmentation in the system. Some of the existing pieces of legislation would be amended to give effect to the Bill, whereas others would be repealed.

The Bill provides, among others, for measures to leverage public procurement to advance economic opportunities for historically disadvantaged people, women, youth, people with disabilities, small, medium, and micro enterprises (SMMEs), and to support localisation for job creation. 

The Bill had a dedicated chapter providing measures for the implementation of a framework that covers a variety of measures for preferential treatment for categories of preferences and the protection or advancement of persons, or categories of persons, historically disadvantaged by unfair discrimination in the allocation of contracts.

The Bill makes provisions for set asides to support black economic empowerment, women-owned, youth-owned enterprises, people with disabilities, and localisation, among others. Measures also aimed to advance small, medium and micro enterprises in high-value procurement.

It introduces a differentiated procurement system for various strategic goods and services, such as capital goods/ projects and infrastructure. Strategic projects would be procured differently from conventional, standard run-of-the-mill goods and services. 

The Bill empowers the Minister to prescribe a framework for preferential treatment for categories of preferences or advancement of persons historically disadvantaged by unfair discrimination. The framework envisaged in the sub-section must consider the B-BBEE Act. 

It promotes the use of technology and requires that the Public Procurement Office must develop an electronic public procurement system to enhance efficiencies, effectiveness, transparency and integrity, and combat corruption.

The Bill was consulted with social partners at the National Economic Development and Labour Council (Nedlac), and the process was completed in October 2022. The Nedlac secretariat submitted its report to the Minister at the end of October.

The Office of State Law Advisor had completed legal vetting. It issued a preliminary certification for the Bill to be submitted to Cabinet, and the Presidency was currently conducting a socioeconomic impact assessment. Once finalised, the Bill would be ready for submission to Cabinet for consideration and introduction to Parliament in March 2023.

Infrastructure procurement

National Treasury was currently engaging the metros to identify challenges in infrastructure procurement, with a view to unlocking bottlenecks caused by the regulatory framework. 

At the national level, engagements were taking place with the Department of Public Works and Infrastructure (DPWI) and its entities to align and streamline the regulatory framework in the construction industry. The above processes would be completed during the new financial year. 

Part of the reforms in the Procurement Bill was the development of a dedicated set of regulations to deal with infrastructure procurement, including consideration of the use of implementing agents in infrastructure delivery within the ambit of the law. This would ensure that the infrastructure budget was spent and not unnecessarily returned to the National Revenue Fund (NRF).  

Measures to promote transparency 

National Treasury introduced a tool to register potential bidders/suppliers on the Central Supplier Database (CSD) to promote transparency in the procurement system.

The CSD was linked to the Companies and Intellectual Property Commission (CIPC) and managed by the Department of Trade, Industry and Competition (DTIC), the South African Revenue Service (SARS), and the banks' details of suppliers.

National Treasury had introduced an e-tender portal to enable organs of state to publish tenders, procurement plans, and results of tender processes, making it easier for potential bidders, including SMMEs, to access government procurement opportunities. 

However, payment of suppliers on time or within the terms of the contractual agreements remained challenging. The Office of the Accountant-General (OAG) was currently seized with this challenge, and regular reports were submitted to the Forum of South African Directors-General (FOSAD) and government institutions. Parliament could assist in this regard.

Update on Q3 deviations and contract modifications report

The OCPO outlined the number of deviations, expansions and modifications approved, including details on the number directed to companies owned by blacks, women, youth, and persons with disabilities.

Section 38 of the Public Finance Management Act (PFMA) provided for the general responsibilities of accounting officers (AC). The AC for a department, trading entity, or constitutional institution must ensure that the department, trading entity or constitutional institution has and maintained the following:

• effective, efficient and transparent systems of financial and risk management and internal control;
• a system of internal audit under the control and direction of an audit committee complying with and operating by regulations and instructions prescribed in terms of sections 76 and 77;
• an appropriate procurement and provisioning system which was fair, equitable, transparent, competitive and cost-effective;
• a system for adequately evaluating all major capital projects before a final project decision.

The AC was responsible for the effective, efficient, economic, and transparent use of the resources of the department, trading entity or constitutional institution. The AC must take effective and appropriate steps to:

• collect all money due to the department, trading entity or constitutional institution;
• prevent unauthorised, irregular, fruitless and wasteful expenditure, and losses resulting  

• from criminal conduct; 
• manage available working capital efficiently and economically. 

The AC was responsible for the management, including the safeguarding and maintenance of the assets, and for managing the liabilities of the department, trading entity, or constitutional institution. The AC had to comply with any tax, levy, duty, pension and audit commitments as may be required by legislation, and must settle all contractual obligations and pay all money owing, including intergovernmental claims, within the prescribed or agreed period.

On the discovery of any unauthorised, irregular or fruitless and wasteful expenditure, the AC must immediately report in writing the particulars of the expenditure to the relevant treasury and, in the case of irregular expenditure involving the procurement of goods or services, also to the relevant tender board.

The AC must take effective and appropriate disciplinary steps against any official in the service of the department, trading entity or constitutional institution who:

• contravenes or fails to comply with a provision of this Act;
• commits an act that undermines the financial management and internal control system of the department, trading entity, constitutional institution; or
• makes or permits unauthorised, irregular, or fruitless and wasteful expenditure.

When transferring funds in terms of the annual Division of Revenue Act (DoRA), the AC must ensure that the provisions of the Act are complied with.

Before transferring any funds -- other than grants in terms of the annual DoRA or to a constitutional institution -- to an entity within or outside government, the AC must obtain a written assurance from the entity that that entity implemented effective, efficient and transparent financial management and internal control systems, or if such a written assurance was not or could not be given, render the transfer of the funds subject to conditions and remedial measures requiring the entity to establish and implement effective, efficient and transparent financial management and internal control systems. 

The AC must enforce compliance with any prescribed conditions if the department, trading entity or constitutional institution gives financial assistance to any entity or person.

The AC must take into account all relevant financial considerations, including issues of propriety, regularity and value for money when policy proposals affecting the accounting officer's responsibilities were considered, and when necessary, bring those considerations to the attention of the responsible executive authority.

The AC must promptly consult and seek the prior written consent of the National Treasury on any new entity which the department or constitutional institution intends to establish or, in the establishment of which it had taken the initiative. 

The AC must comply and ensure compliance by the department, trading entity or constitutional institution with the provisions of this Act.

Contributing reasons for replacing Instruction Note No. 3 of 2016/17

This had been to enhance transparency and to accommodate the recommendations of the Zondo Commission of Inquiry into state capture.

The Commission had recommended that set standards of transparency, consistent with the Organisation for Economic Cooperation and Development (OECD) principles for integrity in public procurement be formulated by National Treasury for compulsory inclusion in every procurement system adopted by a public procurement entity.

The introduction of procurement plans, advertising on the e-tender portal, development of an instruction to provide further elaboration on TR16A6.6 (which deals with the participation on contracts arranged by other state organs), and publishing of all deviations and contract modifications (variations and expansions) had to be submitted to National Treasury. 

In order to improve the turnaround time in the decision-making and expedite service delivery, particularly where the technical comprehension of the required process had to be taken in line with the institution's mandate, this was best placed with the institution. 

During 2020/2021, it was found that there was an increasing number of applications for deviations, extensions and variations. This has exacerbated the long turnaround times and stunted institutions in providing the services required, especially in state-owned companies (SOCs) and institutions with complex capital projects. 

Expanded measures must be provided to restrict suppliers from doing business with the state on a basis other than fraudulent claims of preference points. During the review of the previous Instruction Note, it was established that when it came to the restriction of suppliers for Public Finance Management Act (PFMA)-related transgressions, the general conditions of contract (GCCs) did not apply to the Schedules 2, 3B and 3D public entities, hence the gap in the case of these entities, as Regulation 14 of the Preferential Procurement Regulations (PPR), 2017, could be used only to restrict a supplier for a transgression that was related to the fraudulent claims for preference points in terms of the Preferential Procurement Policy Framework Act (PPPFA). Hence, in the new SCM Instruction 3 of 2021/22, the process to restrict a person or supplier from doing business with the state in terms of the PFMA has been provided for.

To provide measures for restricting and debarring state employees from doing business with the government, the National Treasury adopted the following approach in developing Instruction note 3:

• Ensuring that, to the extent possible, the revised instruction did not encroach on the institutional accountability conferred on accounting officers and accounting authorities regarding the PFMA.
• The Constitutional Court had held that "conduct by an organ of state that had no foundation in some law, breached the principle of legality, which was a subset of the rule of law, a foundational value of the Constitution."
• In other words, accounting officers/authorities were accountable for their decisions, since the PFMA accountability was vested with them.

National Treasury had considered all inputs received in an attempt to find legally cognisable means, which in this case was to provide for reporting requirements that would strengthen the transparency of procurement within institutions, thus forcing accounting officers/authorities to account for their decisions, which would serve as a deterrent against abuse of the SCM system. 

These reports would be a valuable tool for the National Treasury and relevant treasuries to identify possible intervention and support areas, and strengthen compliance monitoring in implementing the PFMA. 

To bridge the disparity between government departments, constitutional institutions and public entities linked to the PFMA in Schedules 3A and 3C on the one hand, and Schedules 2 (SOCs) and 3B and 3D (government business enterprises) on the other hand within public procurement, there had been non-inclusion of SOCs and government business enterprises in Chapter 16A of the SCM Treasury regulations.

To this end, the revised instruction differed somewhat from the strict format of being prescriptive. However, in various areas, it had yet to provide the narrative to provide context to the SOCs and government business enterprises, which the general conditions of contract standard bidding documents did not govern.

Considering the inputs by stakeholders, some of which were conflicting, National Treasury therefore had to strike a balance between competing interests while maintaining the respective legislative provisions. 

Treatment of disclosures and declarations

Treatment of disclosures and declarations allowed institutions to identify and manage all potential conflicts of interest and other disclosures made by a person participating in procurement processes, enabling the accounting officers/authorities to make informed decisions about the person participating in the SCM process.

During the review process, National Treasury had identified several inconsistencies in the broader public procurement regulatory framework, and there was an expectation that the procurement prescripts should resolve these inconsistencies. 

For instance, the Public Administration Management Act (PAMA) of 2014 defined what an "employee" and "public service" was, and when reading these together, they excluded employees of SOCs. Therefore, to close this gap in the legislation, the new instruction extended the prohibition of doing business with the state to employees of SOCs as well.

Concerning the application extension, the previous Standard Bidding Document (SBD) 4 did not apply to Schedules 2, 3B, and 3D public entities, but in the new SCM Instruction 3 of 2021/2022, the SBD 4 included these other entities as well.

Deviations from the normal bidding process and expansions/variations

The power to approve procurement by other means -- such as deviations from inviting competitive bids, which included limited bidding (sole source, single source), expansions/ variations, and written price quotations that fall outside the competitive bidding thresholds -- had been devolved to accounting officers/authorities (essentially returned to the AO/AA), and was no longer vested in the relevant treasuries.

The new instruction provided monthly reporting on procurement by other means (deviations) to the relevant treasuries and the 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 occurred. It thus elevated transparency and reduced any level of obscurity.

National Treasury was developing the compliance reporting framework that the OAG would issue.

These reporting interventions would enhance transparency, which was one of the significant concerns raised in the Zondo Commission of Inquiry into the state capture report.

Enforcement of compliance with the Bid Committee system

In light of several governance lapses that the State Capture Commission had subsequently confirmed, extending the bid committee system and enforcing its implementation to SOCs and government business enterprises had become necessary. 

This was an attempt to instil the culture of a bid committee system to avoid instances of abuse where, as articulated in the State Capture Report, it was indicated that specific projects were procured without the participation, knowledge or approval of the business owners of those projects. 

General requirements were that the Accounting Officer (AC) may invite price quotations or bids only where sufficient provision had been made in the budget; must ensure that the cash flow was sufficient to meet contractual obligations; must pay suppliers within 30 days of receipt of the invoice or the period provided for in the contract; and may not place orders with suppliers for goods and services to be received in the current financial year and arrange with suppliers to be invoiced and payment to be made in the next financial year, except in the case of a multi-year contract.

Most of these provisions were included in the revised instruction to emphasise the compliance requirements, as these were some of the main areas that were abused. Even though these were not necessarily procurement/ SCM provisions, they played out in the SCM environment.

Furthermore, some of these were contained in prescripts that did not apply to Schedules 2, 3B, and 3D public entities. They had therefore been included here.

General comments and observations

The revised instruction made provision for reporting to the relevant treasuries and the AGSA, as well as in the institutions' annual reports.

The intention of the monthly reporting to the relevant treasury and AGSA was to ensure that where there were glaring matters of non-compliance, the OCPO and those equivalent units in the provincial treasuries could act on them.

The AGSA may, in terms of section 5(1)(d) of the Public Audit Act, consider a particular investigation or audit if it deems it to be in the public interest to do so, based on the report it receives from the institution. In other words, the rationale was to provide transparency with the belief that early detection could assist with the intervention by National Treasury, the relevant treasury and the AGSA, and even to refer such cases to law enforcement agencies if required.

The purpose of providing for reporting in the annual report was to ensure that the public also had access to this information, and that it was not hidden away in an obscure report that was difficult to access or even interrogate. It would also provide ease of reference for the structures to whom AOs/AAs were required to report. 

Most of the remarks from the State Capture report highlighted the lack of transparency in procurement processes, and these reports aimed to enhance transparency further. It was anticipated that transparency would also help to hold accounting officers/authorities accountable for their decisions. 

Repeal and withdrawal of Instructions, Practice Notes and Circulars

The following prescripts were considered in the review, and would therefore be repealed by the instruction:

• National Treasury SCM Instruction Note 3 of 2016/17;
• Instruction Note No 32, dated 31 May 2011, related to enhancing compliance monitoring and improving transparency and accountability in supply chain management;
• Supply Chain Management Circular postponing implementation of specific paragraphs in Instruction Note No 32 dated 31 May 2011 related to enhancing compliance monitoring and improving transparency and accountability in supply chain management;
• Practice Note Number 7 of 2009/2010 dated 2 October 2009, and the SBD4 document;
• Practice Note No SCM 5 of 2006 on the restriction of suppliers and the augmentation of general conditions of the contract;
• National Treasury Practice Note on the prohibition of restrictive practices: certificate of independent bid determination: standard bidding document;
• Practice Note No SCM 4 of 2006 on standard bidding document: Declaration of bidder's past supply chain management practices.

This would reduce the fragmentation in the public procurement/SCM regulatory environment and lessen the burden of complying with conflicting regulatory requirements by SCM practitioners, as the issues contained in these prescripts had been reduced to a single document.

Governance, Monitoring & Compliance

The following outlined the new instruction changes as to how deviations and variations are processed and approved.

Deviations from normal bidding processes:

• Removed from National Treasury or relevant treasuries granting approval /support to deviations from due procurement processes;
• Responsibility and accountability had been devolved and were now vested with the AO/AA;
• AO/AAs must draft their SCM policies and include procedures for procurement "by other means";
• Procurement by "other means" was to be reported to the relevant treasury and the AGSA within 14 days after the finalisation of the procurement;
• Procurement "by other means" (deviations) would be recorded in the institution's annual report.

Expansions and variations of contracts:

• Removed from OCPO approval/support for expansions or variations;
• Responsibility and accountability had been devolved and were now vested with the AO/AA.
• If construction-related contracts were expanded or varied by more than 20% or R20m, and goods and services contracts were expanded or varied by more than 15% or R15m (including all taxes), whichever was the lesser, the AO/AA must submit monthly reports to the relevant treasury and AGSA.
• Expansions and variations must be recorded in the institution's annual report.

Relevant treasuries' role in Instruction 3 of 2021/2022

Enhance reporting tool (E-tender portal or similar) to extract and analyse trends, such as:

• Identify Institutions with a high number of deviations and contract variations;
• Determine the root causes of the deviations and variations (or "other means of procurement");
• Support institutions where specific trends were apparent;
• Provide advice on SCM procedures and practices;
• Take immediate corrective action by intervening where there was evidence of persistent abuse of the system;
• Access to the reports would be made available to all provincial treasuries, oversight bodies, and members of the public.

Comparison between old and new instruction notes

Analysis of the deviations showed a substantial overall shift in the total transaction amount, from R8.1 billion to R2.6 billion. This could be due to institutions not procuring any more using deviations. It could also be due to institutions needing to report deviations per the new Instruction Note.

The OCPO would be writing to the institutions in the top 20 in the old Instruction Note but no longer featured in the new Instruction Note, and would ask if no transactions had been done through the deviation process.

Upon receipt of a "no" response, such institutions would be referred to the AGSA for a special audit process to verify if a "no" answer was true. Some had since reported, but late. Such transactions would be prioritised upon a "yes" response for site visits and bid reviews.

Contract modifications

There had been a substantial overall shift in the total transaction amount, from R11.8 billion (old) to R988 million (new). This could be due to institutions not doing contract modifications anymore. It could also be due to institutions needing to report contract modifications per the new Instruction Note.

The OCPO would be instituting a writing process for the institutions in the top 20 in the old Instruction Note but no longer featuring in the new Instruction Note, and ask if there were no contract modifications done.

Upon receipt of a "no" response, such institutions would be referred to the AGSA for a special audit process to verify if a "no" answer was true. Some had since reported, but late. Such transactions would be prioritised upon a "yes" response for site visits and bid reviews.

National Treasury briefing on its third quarter expenditure

Dr Mampho Modise, Head: Public Finance, National Treasury (NT), led the presentation on its 2022/23 third quarter expenditure. 

Mr Lefentse Radikeledi, Director, Development Finance Institutions (DFIs), NT, provided a status update on state-owned companies. 

Update on third quarter expenditure

National Treasury advised the Committee that departments had reported a combination of overspending and underspending. 

They had shown significant underspending in the third quarter, including the Department of Cooperative Governance and Traditional Affairs (COGTA) at R2.6 billion, the Department of Social Development (DSD) at R1.9 billion, the Department of Transport (DoT) at R1.5 billion, and the Department of Basic Education (DBE) at R766.5 million.

Departments with significant overspending were the Department of Public Enterprises (DPE) at R7 billion, followed by the South African Police Services (SAPS) at just under R1 billion, the Department of Science and Innovation (DSI) at R684 million, the Department of Higher Education and Training (DHET) at close to R600 million, followed by the Department of Environmental Affairs (DEA) and the Department of Employment and Labour (DEL) at around R350 million. 

On aggregate, the underspending amounted to R93.2 million. However, this needed to reflect the minimum underspending in the fourth quarter as the Department adjusted its growing schedule for budget adjustments. 

The NT continued to report on the Covid expenditure. The Department of Social Development had spent R21.3 billion on the R350 grant at the end of the third quarter. 

It was reported that R2.7 billion had been spent on disaster management at the end of the third quarter.  

The South African Roads Agency Limited (SANRAL) reported that for the second quarter, total receipts of R12.39 billion were higher than its projection of R11.97 billion -- a variance of R421.1 million. Total payments of R10.3 billion were R5.69 billion lower than the projected R15.99 billion. The cash surplus was R2.09 billion at the end of the second quarter.

Status update on State-Owned Companies 

Land Bank 

The Land Bank has been in default since April 2020, and the new Board of the Land Bank has been trying to cure the default position of the bank to enable it to function as a sustainable DFI. 

Three versions of the liability solution have been rejected by lenders thus far, and the Land Bank is currently negotiating liability solution version 4 (LS4) with its lenders. 

It prioritised the resumption of lending activities that would focus on new development clients while also maintaining the quality of the Bank's existing client portfolio.

The Minister was in the process of transferring R5 billion in the current financial year to the Land Bank and providing conditions that would support the utilisation of the money, including curing the default and supporting the blended finance programme. The Minister and the Land Bank were currently appointing a permanent CEO and filling other critical vacancies to help strengthen the Bank's executive leadership. 

It had received an unqualified audit opinion from the AGSA for the 2021/22 financial year, which signalled the significant improvements made in the bank's internal controls and the remedial action plan implemented to remedy the findings of the past two financial years.

Almost R5 billion of the R7 billion recapitalisation was planned to flow to the Land Bank before the end of the 2022/23 financial year. The R5 billion meant to support it was still housed in the government contingency reserves fund. The remaining R2 billion was targeted to repay guarantee lenders. The World Bank had already paid almost R100m of the R2 billion as a call on guarantees.

The Land Bank was still exempted from tabling its corporate plan until the debt default was cured. However, it was still submitting the shareholder compact.

Eskom

Eskom was the single most significant risk to the South African economy, and resolving the security and reliability of the electricity supply must be prioritised. Its high levels of debt posed significant risks to its going concern status and financial sustainability, as well as to the fiscus. 

Eskom's profitability could be better, as its long-term sustainability had been adversely affected by an inadequate tariff path, poor generating plant performance, increasing municipal arrear debt, and high debt servicing costs. It had reported a loss before tax of R8.9 billion as of 31 December 2022, against a budgeted loss of R4.8 billion. In December 2021, it reported a profit before tax of R3.7 billion. 

Eskom's gross debt securities and borrowings had increased to R423.2 billion at 31 December 2022, compared to R396.3 billion in March 2022, which it attributed mainly to the weakening of the rand on foreign-denominated borrowings. 

Eskom relied on government support to provide debt relief and ensure its status as a going concern. Of the R21.9 billion in equity allocated for the 2023 financial year, R11 billion had been received by 31 December 2022, with the remaining balance received in January 2023. 

On 31 December 2022, R323 billion (92%) had been committed from the R350 billion government guarantee facility granted to Eskom, leaving R27 billion unallocated for future funding. Eskom's guarantee facility agreement was expiring on 31 March 2023. 

The non-payment of municipal debt was a systemic challenge to the electricity industry. It had increased to R56.3 billion, compared to R44.75 billion in March last year -- an increase of 84.3%, implying a worsening trend in the non-payment of current accounts. Eskom had pursued a multi-pronged strategy to recover the municipal arrear debt owed, but had yet to succeed. 

On 12 January, NERSA announced its decision to award Eskom an average tariff increase of 18.65% for FY2023/24, and 12.74% for FY2024/25. This decision would positively contribute to Eskom's financial sustainability.

South African Post Office (SAPO)

SAPO's financial position continued to be severely constrained, and cash flow was managed very closely.

Year-to-date revenue of R1.9 billion was R1.6 billion (46%) lower than budget, and R590 million (23%) lower than the previous year. Expenses of R3.8 billion were R1.2 billion (25%) lower than budget, and R631 million lower than the previous year. It should be noted that the expenditure still exceeded revenue, resulting in a loss of R1.576 million after considering the Universal Services Obligation (USO) subsidy.

Outstanding liabilities amounted to R5.3 billion, with statutory payments of R2.9 billion representing 55% of the amount. 

SAPOs USO mandate continues to be funded on budget. 317 employees left the service on 31 December through voluntary severance packages. 

No further funding has been allocated to SAPO for 2022/23. Government guarantees currently need to be put in place for SAPO.

DENEL 

Continued liquidity constraints had led to work stoppages and non-delivery on contracts, resulting in contract terminations. 

Denel was insolvent, with reported liabilities exceeding assets to the tune of R1.1 billion, against the budgeted R406 million, as at 31 December. Due to poor revenue generation, the entity could not cover its cost base, leading to operational losses. 

As of 31 December, Denel had reported a net profit of R269 million attributed to once-off proceeds of R992 million from the liquidation of the Denel Medical Benefit Trust (DMBT) surplus funds. Overall, the entity remained behind budget for the year. 

Denel had yet to submit audited annual reports for the past two years.

South African Airways (SAA)

NT was requested to provide quarterly updates to Parliament on utilising the R2.7 billion allocation to SAA subsidiaries, which formed part of the R10.5 billion allocated to it during the 2020 medium-term budget policy statement (MTBPS). However, the Second Adjustments Appropriation Act had specifically and exclusively earmarked the entire R10.5 billion to implement SAA's business rescue plan. Hence, the R2.7 billion could not be transferred to the SAA subsidiaries, since the subsidiaries were not under business rescue. 

The Special Appropriation Act provided the following funding for each subsidiary: 

• South African Airways Technical SOC Ltd (SAAT) – R1.663 billion;
• Mango Airlines SOC Ltd (Mango) – R819 million; 
• Air Chefs SOC Ltd (Air Chefs) – R218 million. 

SAA exited business rescue on 30 April 2021, but remained under care and maintenance until September 2021, when it resumed operations. 

Net group losses for the first three quarters of the year amounted to R50 million, a significant improvement from the projected budget loss of R637 million.

SAA was no longer technically insolvent. The net equity value as at the end of 2022 amounted to R1 billion.

Airports Company of South Africa (ACSA)

Government supported ACSA by purchasing preference shares of R2.3 billion in 2020/21. 

Travel restrictions and the grounding of airlines had severely impacted ACSA's revenue generation. Passenger volumes were expected to recover to pre-pandemic levels by 2026/27. The entity was now focused on improving its aeronautical revenue and greater diversification of its revenue base by focusing on non-aeronautical revenue. 

ACSA incurred an unaudited loss of R1.47 billion for 2021/22. However, this was an improvement on the R2.56 billion loss incurred in 2020/21. Its performance continued upward, generating a net profit of R403 million for the first three quarters of 2022/23.

All additional financial support would be optional for the foreseeable future, with ACSA expected to start generating a net profit from 2023/24.

TRANSNET 

Ongoing security incidents, locomotive unavailability and the poor state of the rail infrastructure, had negatively impacted Transnet Freight Rail operations. Its network inefficiencies posed a significant risk to the South African economy and required urgent intervention. 

The decline in freight rail resulted from a confluence of factors which, amongst others, included operational inefficiencies, theft and vandalism, and underinvestment in the network.

Per published studies, port productivity was significantly lower than the benchmark for African and European ports. Maintenance of critical equipment was the main contributor, as the port of Durban seldom had higher than 60% availability of container equipment. 

One of the conditions attached to the funding provided to Transnet in 2022/23 was that an independent review led by the National Treasury of all freight corridors and associated port operations would be undertaken with a specific focus on identifying opportunities for operational efficiency improvements.

(See the presentations for further details). 

Discussion

Mr Z Mlenzana (ANC) asked the OCPO to elaborate on the legally permissible route to deal with entities that bypass normal supply chain processes.

Regarding the NT's presentation on underspending, he expressed his concern about how the NT protected the perennial underspenders. He requested that the NT expand further on the number of departments underspending.

On state-owned enterprises (SOEs), he requested the NT to provide guidance as to whether five specific SOEs required the Committee's focused oversight. 

He expressed concern about removing funding from the Enoch Mgijima local municipality in the Eastern Cape. He asked the NT to provide clarity on why the municipality was reported to be underspending, when rather funds had been removed from the operation. 

Mr A Sarupen (DA) noted the process of transferring the R5 billion in the current financial year to the Land Bank, and asked whether there were any further guarantees, and if agreements had been concluded with the various lenders. Had the creditors accepted the recovery plan? 

Regarding Eskom, he expressed concern that it was reported in the presentation that Eskom had met the 24 conditions attached to the equity allocation. However, in reality, Eskom's financial situation and performance could be better. He asked the NT to disclose the conditions allocated to the amounts. 

Based on the lack of government guarantees for the Post Office, what turnaround plan and interventions would the NT implement? 

As Denel was insolvent, what monitoring was being undertaken to ensure compliance with SARS and staff pay-outs?

He welcomed the reduction of losses at SAA, and asked for an update on its proposed equity partner.

Finally, on the NT's third quarter expenditure report, he noted the increase in disasters impacting the fiscus, and asked if the contingency reserve would be increased in the new year.

Ms D Peters (ANC) noted with concern the NT's report on the underspending of the DSD and the South African Social Security Agency (SASSA) due to the lower-than-expected uptake. She said this contradicted the high number of unemployed persons and poor households in the communities. 

She noted that women and youth should benefit from government procurement in general, and called for the economic inclusion of women and youth-owned companies. She added that delayed payments had a negative effect on the progress of small and medium-sized enterprises (SMEs). She recommended that timely payments should be a performance indicator.

Mr X Qayiso (ANC) supported the recommendation for the economic inclusion of women and youth-owned companies. He asked the OCPO to provide a breakdown of gender in terms of government procurement.

On the yearly expenditures, he requested the NT to elaborate on the top ten underspending departments. 

Concerning SOEs, he noted that small-scale farmers required considerable assistance. 

He said the report on Eskom's compliance with equity allocation conditions needed to be clarified. Compliance would imply improvement, so this statement required a further explanation from the NT. 

He recommended that the Post Office should not rush into the retrenchment of staff, but should instead submit a strategic proposal requesting the government's intervention. 

On Transnet, he noted the lack of support to provide securities for the entity, and added that this should be included and prioritised in the Public Procurement Bill. 

Ms E Ntlangwini (EFF) commented on the over and under-spending of departments, specifically expressing concern for the repeated underspending by the DoT, the DBE and the SAPS. She asked if the NT implemented measures to assist such departments. 

What amount of money was invested in the economic inclusion of women-owned companies?

Regarding public entities, she expressed concern that the NT had outlined only the challenges, and asked it to provide recommendations for improvement. She also requested more transparency on the equity partners of SAA. 

The Chairperson asked the OCPO a series of questions on transversal term contracts. He asked whether the SOEs participated in these contracts, and for examples to be provided. What percentage of these contracts were given to youth and black people? What were the disadvantages of these contracts, and the remedies for any disadvantages? 

He requested the OCPO to clarify what monitoring measures would be implemented on broad-based black economic empowerment to ensure that public entities complied. 

To the NT, he expressed concern for the substantial underspending towards the end of the year, saying that it may hinder the Committee from fulfilling its oversight role.

Responses

Mr Moifo responded on the issue of transversal contracting. In 2022, the OCPO observed that the value of this type of contract was, on average, R100 000 cheaper than other individual contracts. The OCPO would provide a further breakdown to the Committee at the next briefing. 

The reasons for SOEs not participating in transversal contracting varied. For example, some SOEs preferred contracting at an institutional level. 

The OCPO had not analysed the percentage of the contracts given to youth and black people. This breakdown would be provided to the Committee at the next meeting. 

He added that the capacity of organs of state to manage these contracts may be challenging, and suggested that there may be more advantages in centralising responsibilities. 

Mr Mathebula said that organs of state were required to comply with B-BBEE as a government policy, and the OCPO continued monitoring compliance. He emphasised the importance of the measures to advance SMMEs in high-value procurement.

Suppliers had to be paid on time. He agreed with the Committee that delayed payments negatively affected SMEs' progress, and that this should be a performance indicator for accounting officers (AOs). 

While the NT provided the framework, government organs should also develop procurement processes. The Bill and regulations would provide greater clarity on this. 

Regarding procurement transparency, the OCPO had updated the central supplier database to include new features and to strengthen anti-fraud measures.  

Dr Modise said there would be an update on the Integrated Financial Management System (IFMS) at the next Committee meeting. 

On the underspending, the NT elaborated that the first type of underspending was through the withholding of grants. This was consistent throughout the year. The NT may also withhold funding from non-compliant municipalities, but would attempt to assist them with a quick resolution of their challenges  

The NT was aware of the challenging community conditions regarding the equitable issuance of grants. However, there was an abuse of grants, which had to be considered in grant distribution. 

She noted the substantial challenges in employment in the government due to the lengthy delays in recruitment and appointments. 

The NT would provide a detailed breakdown of the underspending and its recommendations at the next briefing. Commenting on underspending and conditional grants, it stated that there was a difference between what the Department transfers to a municipality and what the municipality spends. 

In almost all cases when conditional grants were withheld due to a breach of the Division of Revenue Act, it was related to persistent underspending by that municipality, and thus the money was withheld. There was not necessarily an escalation included in this. The contracting arrangements between the municipality and its service providers would determine the escalation. The withholding of funds from non-compliant municipalities was conducted on an exceptional basis. 

Mr Ravesh Rajlal, CD: Sectoral Oversight, NT, said that the Department would provide the Committee with a detailed breakdown of Eskom's compliance with the 24 conditions attached to the equity allocation. He added that different conditions would be added when the new support package was announced on 22 February. 

On Denel, a payment plan to SARS had been instituted. The plan's success depended on R3.4 billion support, and whether Denel would meet the preconditions. 

Progress at SAA could be made only if the concurrent creditors and outstanding liabilities were resolved. 

Mr Radikeledi responded on the Land Bank issue, and said there were no further agreements with other lenders. The creditors had technically accepted the recovery plan, pending compliance with certain outstanding conditions. 

The Chairperson thanked the Departments for their presentations. 

The meeting was adjourned.