ATC120523: Report on The Auditor-General of South Africa on a Performance Audit of the Infrastructure Delivery Process at the Provincial Departments of Health, dated 23 May 2012

Public Accounts (SCOPA)

UNEMPLOYMENT INSURANCE FUND

(THE FOLLOWING REPORT REPLACES THE REPORT OF THE COMMITTEE ON PUBLIC ACCOUNTS WHICH WAS PUBLISHED ON PAGE 2558 IN ATC NUMBER 91, DATED 19 JULY 2012.)

 

 

FOURTEENTH REPORT OF THE COMMITTEE ON PUBLIC ACCOUNTS ON THE REPORT OF THE AUDITOR-GENERAL OF SOUTH AFRICA ON A PERFORMANCE AUDIT OF THE INFRASTRUCTURE DELIVERY PROCESS AT THE PROVINCIAL DEPARTMENTS OF HEALTH, DATED 23 MAY 2012

 

 

1. Background

 

The Auditor-General of South Africa (the Auditor-General) conducted performance audits of the infrastructure delivery process at the departments of Health and Education as part of a transversal performance audit on infrastructure delivery.

 

The transversal report was tabled in Parliament on 6 September 2011.The provinces specific reports were tabled in the respective provincial legislature.

 

2. Findings and recommendations

 

 

The Committee on Public Accounts (the Committee) heard and considered evidence on the

22 November 2011 form the provincial Members of Executive Council for Health and Finance, the Deputy Minister of Health, and the Head of Departments from the following Provinces:

 

  • Eastern Cape ;
  • Free State ;
  • Gauteng ;
  • Kwa-Zulu Natal ;
  • Limpopo ;
  • Mpumalanga ;
  • North West ;
  • Northern Cape ; and
  • Western Cape .

 

2.1 Demand acquisition

 

The Auditor-General raised specific concerns on the following and reported as follows:

 

a) The success of an infrastructure project depends, to a large extent, on the quality of the needs assessment and planning of a project. In the Free State , Gauteng , KwaZulu-Natal , Limpopo , Mpumalanga , North West and Western Cape provinces , scope changes were made subsequent to the start of and during construction as all the needs were not included in the projects’ initial planning. The scope changes were effected during the planning phase, or variance orders were used, which resulted in higher project costs. The following serve as examples:

 

· In the Western Cape, four projects were identified where the total project cost at completion had increased by up to 260% between the first time it appeared on the budget in 2004 and the last time it appeared on the budget in 2008 as available project information was not sufficient at the identification stage of the projects to ensure that realistic values were allocated to projects on the infrastructure budgets.

 

· During 2005, the budgeted cost for the construction of the Zola Hospital Complex in Gauteng increased to R624,4 million (144%) from the initial estimated cost of R255,7 million due to, inter alia , changes and additions to the scope of work. This included a complete revision of the scope of work as the project changed from a 250 to a 300-bed district hospital in 2005, which resulted in the preparation of a new project implementation plan. Although the project should have been completed during November 2007, according to Revision 1 of the project implementation plan dated 10 March 2005, the expected completion date was moved to February 2011 and according to recent information obtained it was postponed to December 2011.

 

b) A lack of capacity and qualified staff to ensure that the planning of the infrastructure projects took place on time in the KwaZulu-Natal and Western Cape provinces at the provincial departments of Health and Public Works and other implementing agents, resulted in long delays in completing the planning of projects. The following serves as an example:

 

· The construction of clinics and hospitals in KwaZulu-Natal were delayed due to the lack of capacity of officials at the provincial Department of Public Works who acted as the implementing agent for the provincial Department of Health. The department committed itself to manage more projects than they could cope with, resulting in delays of up to five years. A service level agreement was drawn up by the provincial departments of Health and Public Works and the Ithala Development Finance Corporation, transferring various projects to them in an attempt to avoid further delays in finalising the construction of the projects. Eight of the projects with a total value of R198,6 million that were transferred, had already been delayed between one to five years. Furthermore, Ithala Development Finance Corporation also had a lack of capacity, as six programme managers were appointed to manage 29 projects for the provincial Department of Health and 230 projects for the provincial Department of Education.

 

c) Although the need for facilities in the Free State was identified in the 1990’s, tenders for their construction were awarded up to 13 years later. During 1997-98, a needs determination was done for some of the infrastructure projects and consultants were appointed to draw up plans for the projects. However, due to the magnitude of the projects, it was later decided to divide them into phases. No evidence could be submitted that the needs for the various phases were reassessed or that amendments to the original plans were made to ensure that they were still relevant and incorporated new infrastructure technology

 

d) The planning of projects in Kwazulu-Natal , Gauteng and North West did not always coincide with funds and other resources being available to execute the projects. The following serve as examples:

 

· In Kwazulu-Natal , the original budgets for 13 projects increased as a result of delays during the planning stage of the projects. One of the major contributing factors was that planning was started knowing that funds will not be available immediately. Therefore, the planning had to be revisited before commencing with the project to ensure compliance with the changes in the relevant legislature, regulations and trends that occurred. For eight of these projects, a variance of R332,4 million arose between the original budget and the actual expenditure.

 

· In Gauteng, advertisements calling for tenders for the construction of two new wards at the Sterkfontein Hospital were placed in the media by the provincial Department of Public Works, 30 months after the date proposed by the provincial Department of Health.

 

e) The provincial departments of Public Works and Health in the Limpopo, North West and Western Cape provinces had not monitored the time taken to complete the designs. The average design period for six projects in the Western Cape was 21 months, and a comparison with the respective construction periods indicated that for five projects the design period was longer than the construction period. Shortcomings were indentified in the design plans for accommodation at the Khayelitsha and Mitchells Plain district hospitals. Furthermore, in the North West province, standardised design plans that require standardised materials for similar projects were not used during planning and, as a result, hospitals, clinics and health centres were designed individually without considering savings by using standard plans and thereby eliminating some of the design costs.

 

f) The communication and coordination between the provincial departments of Health in KwaZulu-Natal , Mpumalanga , North West and Gauteng , the communities, local authorities and/or hospital management was ineffective to ensure comprehensive infrastructure delivery as all the role-players were not properly engaged during the planning of the projects. This contributed to the needs for infrastructure projects not being properly identified and addressed before the commencement of the projects. The following serve as examples:

 

· The North West provincial Department of Health did not effectively liaise with the local community and the adjacent mining company to ensure that the new Bapong clinic would be constructed in a demarcated area suitable to all role-players and that would adequately address the health needs of the community. Project construction was postponed during June 2008 as a result of a court interdict obtained by the tribal authorities and the adjacent chrome mine. The estimated budget for the new Bapong community health centre amounted to R24 000 000. The Independent Development Trust Client Progress Report for February 2008 for the North West Health Infrastructure Programme Phase 3, indicated a further increase in cost of R15 220 000. According to the 2011 Medium Term Expenditure Framework the Bapong community health centre is progressing well and was 98 percent completed on 31 March 2011.

 

· Management at the Kalafong Hospital in Gauteng was not engaged during the planning stage of the project for upgrading and renovating the intensive care unit, to ensure that their needs were addressed before commencement of the project. This resulted in scope changes and a delay of 41 months after the planned date of completion for this project in which critically ill patients on life support systems were affected.

 

The Committee recommends that the Accounting Officer for the National Department of Health ensures that:

a) A specific policy that deals comprehensively with the infrastructure delivery process in the health sector is in place;

b) Roles and responsibilities of the national department, provincial departments and implementing agents should be defined;

c) A formal prioritisation model with set priorities to facilitate the ranking of needs to ensure that the most urgent needs are addressed first;

d) The guidance on the evaluation of contract proposals especially with regard to the evaluation of the capacity of contractors to execute multiple contracts; and

e) There is stakeholder interaction and consultation with community organisations, governing bodies and local authorities.

 

2.2 Acquisition management

 

The Auditor-General of South Africa raised specific concerns on the following and

reported as follows:

 

a) The appointment of contractors and consultants involved in infrastructure projects were delayed as, in some instances, the bid evaluation process took longer to complete than the validity period of the bids. The process was not always cost-effective as the Bid Evaluation Committees and the Bid Adjudication Committees did not properly consider the prescribed procurement legislation and regulations in evaluating, scoring and making recommendations to the accounting officer regarding awarding bids. This contributed to contracts being awarded to contractors that did not have the skills and capacity to execute these projects. Procurement legislation, regulations and practice notes issued by National Treasury were contravened in approximately 38% of the projects audited.Where possible irregular, fruitless and wasteful expenditure was identified, the accounting officer was requested to investigate the matter and institute the actions as required by the Public Finance Management Act.

 

b) The procurement legislation and regulations contains requirements that contractors must fulfil before being appointed. The contractors’ ability to comply with these requirements is indicative of its ability to successfully complete the allocated projects and a tax clearance certificate indicates that a contractor’s tax affairs are in order or that satisfactory arrangements had been made with the South African Revenue Service to meet any outstanding obligations. In the Free State , Gauteng and North West provinces, three contracts to the value of R1,3 billion were awarded to bidders that failed to submit original tax clearance certificates from the South African Revenue Service. None of the three projects were completed by the contractors and they had to be replaced. The following serves as examples:

 

· In the Free State , a contract to the value of R19,4 million was awarded to a contractor that failed to submit an original tax clearance certificate. Although the Bid Adjudication Committee supported the recommendation of the Bid Evaluation Committee to disqualify the bidder because it did not submit a tax clearance certificate, the head of the provincial Department of Public Works appointed the bidder in contravention of the Preferential Procurement Policy Framework Act. The contract with the contractor was terminated due to insufficient progress and poor quality of construction work. A replacement contract was appointed on 24 November 2008. As at 19 July 2011, the provincial Department of Health confirmed that the work by the second contractor was completed although challenges remained on the quality issues.

 

· In Gauteng , a contract to the value of R334, 9 million was awarded to a joint venture to construct the Zola Hospital Complex without confirming the validity of the tax clearance certificates of the members of the joint venture. After the withdrawal of three of the joint venture partners, only one contractor remained. The provincial Department of Health entered into a contract with this contractor, to the value of R480 million, in August 2008. Subsequently, the provincial department of Health’s own investigation found that the contractor misrepresented the validity of its tax clearance certificate, with tax returns outstanding since 2004. Furthermore, the contractor failed to make sufficient progress and deliver quality work. The contract was terminated in September 2008.

 

Furthermore, a contract to the value of R457 million for the Brits Hospital was awarded to the same contractor in the North West province. The contractor did not submit the required tax clearance certificate and the outstanding taxes were deducted from the first payment to the contractor in the form of a garnishing order. The contract with the Joint venture of the Brits hospital was terminated. During a follow-up visit to the hospital in June 2011, it was indicated that the company that originally submitted the lowest bid was appointed as replacement contractor to complete the hospital. The Brits hospital is now due to be finalised in August 2012.

 

c) In seven provinces, the Bid Evaluation Committees did not consult the Construction Industry Development Board register to confirm the registration and grading of the bidders during the evaluation process. Contracts to the value of R876,8 million were awarded to contractors for the construction of hospitals, clinics and health centres while the contractors were either not registered with the Construction Industry Development Board or were registered, but held a contract designation grading lower than required.

 

d) The procurement legislation and regulations prescribe a process that needs to be followed during the appointment of contractors to ensure that the process is fair, equitable, transparent, competitive and cost effective. In the Gauteng , Free State , Kwazulu-Natal , Limpopo and North West provinces, contracts were awarded to contractors other than those recommended by the Bid Evaluation Committees and Bid Adjudication Committees. The accounting officer overruled or did not consider the decisions and recommendations of the committees. In most instances, the reasons for decisions were not documented as required. This contributed to contracts being awarded to contractors at higher prices than the bid prices of contractors that were recommended by the committees concerned.

 

e) In the Free State , Gauteng , Mpumalanga , North West and Limpopo provinces, the Bid Evaluation Committees disqualified bids based on the bidding prices of prospective suppliers being too low or too high compared to a predetermined estimate. In the Limpopo province, this practice was followed throughout as a standard working method. These bids were excluded from the evaluation process despite this practice being specifically prohibited in a supply chain management practice note issued by National Treasury.

 

f) Bid Evaluation Committees did not sufficiently consider and verify the financial viability, available resources, capacity, ability and experience of the contractors and consultants during the appointment process. Furthermore, the contractor’s Construction Industry Development Board grading was also not always used as an indicator of its ability to complete multiple contracts simultaneously. As a result:

 

· Multiple contracts were awarded to contractors or consultants in seven provinces. Contracts with most of these contractors were subsequently terminated due to insufficient progress, unsatisfactory workmanship or a failure to cooperate with the implementing agents.

 

· Multiple contracts in Gauteng , North West and the Eastern Cape were awarded to one contractor. Seven contracts to the value of more than R1 billion were awarded within a period of 36 months to this contractor individually or as part of a joint venture where in many instances it was the lead contractor. All the contracts awarded by the respective departments of Health were terminated. These contracts were awarded not withstanding the contractor’s Construction Industry Development Board grading of “8 CE PE” that only allows it to conduct projects of R30 million to R100 million.

 

The Committee recommends that the Provincial Accounting Officers ensures that:

 

 

a) The document management systems are strengthened so that all the relevant documents from the initial needs determination up to project closure are available;

b) Disciplinary actions against responsible persons should be considered where documentation could not be submitted for auditing purposes;

c) Staff involved in the supply chain management process should be trained in the application of the relevant legislation and regulations, in instances where these were not followed, it should be investigated and where necessary disciplinary actions should be instituted;

d) The Construction Industry Development Board register should be consulted to determine the contractor’s capacity before bids are awarded; and

e) Contractors not performing to the contract specifications should be reported to the Construction Industry Development Board. Ensure there is compliance with laws and regulations.

 

 

 

 

 

 

 

2.3 Project management

 

The Auditor-General of South Africa raised specific concerns on the following and reported as follows:

 

a) Project management is the responsibility of the implementing agent, the provincial departments of Public Works or the service agent that the provincial departments of Health appointed in this role. The Department of Health nevertheless has to play an oversight role to ensure that the implementing agent is fulfilling its role as agreed and that the end product will serve its needs. To ensure effective service delivery, infrastructure needs to be completed on the planned target date. The projects selected for detailed auditing were, for the most part, either completed late or still being constructed although the contractual completion dates had passed. Where possible, the planned completion dates were compared to the actual completion dates of the projects or the progress at the time when the projects were audited.

 

b) During the construction contract period, the progress on the projects is discussed at regular site meetings. During these meetings, outstanding issues are resolved, decisions are made and instructions are given to the contractors. Although the contractors, provincial departments of Health and Public Works and/or the implementing agents have the responsibility to attend site meetings, in Gauteng, KwaZulu-Natal, Mpumalanga and North West provinces they did not regularly attend such meetings. In some instances, projects were not properly monitored due to capacity constraints. The following serve as examples:

 

· Minutes of 36 meetings compiled during the construction of new wards at the Standerton Hospital in Mpumalanga were submitted for auditing. An analysis of these minutes showed that officials from the provincial Department of Public Works did not attend 25% of the site meetings held for the project while officials representing the provincial Department of Health did not attend 78% of these meetings. Although the planned completion date for the project was June 2007, the project was still in progress during 2009. According to the provincial Department of Health, their poor attendance at the site meetings was due to a lack of capacity. This delayed the actions or responses of responsible officials when problems were experienced.

 

· Officials from the KwaZulu-Natal provincial Department of Public Works and/or the implementing agents did not regularly attend site meetings due to capacity constraints. The provincial Department of Public Works had a vacancy rate of 64% and the implementing agent had a staff complement of six programme managers to manage 29 projects with a value of R337,4 million for the provincial Department of Health. In addition, the implementing agents used the same resources to manage 230 projects with a value of R210 million for the provincial Department of Education.

 

c) Although the provincial Department of Health has the responsibility of visiting projects from time to time to ensure that progress and the quality of work is according to specification, the implementing agent carries the primary responsibility for the oversight of all construction work. In 42% of the projects audited, poor quality of construction work was identified.

 

However, this was not identified during the site inspections by the implementing agents, or site inspections were not conducted. In some cases, unsatisfactory work was identified but left unaddressed due to inadequate monitoring by the implementing agents or the fact that the site meeting were not regularly attended by all the relevant role-players. Several defects in constructions were, however, noted during the site visits by the Auditor-General of South Africa .

 

d) Although contractors did not make adequate progress during the contractual term, their contracts were either not cancelled timely or delays in appointing replacement contractors were identified as the implementing agents did not regularly monitor the progress on the projects to ensure the timely cancellation and replacement of contractors. When contractors were replaced, additional costs were incurred; therefore, the combined costs of the original and the replacement contractors exceeded the original contract price in some instances. The following serve as examples:

 

· In the Northern Cape , a joint venture was appointed to construct the New Mental Health Facility in Kimberley at a contract amount of R290,5 million, with a commencement date of 13 September 2005 and a completion date of 14 December 2007. An extension of 131 days was granted and the completion date was amended to 20 March 2008, but the hospital was still not complete as at December 2009 when the contract with the joint venture was terminated. A site visit in November 2010 confirmed that work on the project had not resumed. The total amount spent before the contract was terminated was R354,4 million. It was estimated that another R53 million will be needed to complete the project.

 

· In the Eastern Cape , the provincial Department of Health did not take prompt action to cancel contracts where contractors did not show the required progress and/or where the quality of work did not meet the standards. Four projects were identified where contracts were only terminated approximately two years after the planned completion dates of the projects. The actual construction cost of one project amounted to R142 million at the time of the termination, which was 36% more than the original contract amount of R105 million. The tender was advertised to appoint a replacement contractor. However, as the tender for the completion of the project was R57,6 million, additional construction costs owing to the non-performance of the original contractor was estimated at R95 million which was 90% more than the original contract amount.

 

· In the North West province, a contract with a value of R460 161 was awarded with a planned completion date of 23 April 2006. The contract was terminated in February 2007 due to insufficient progress and poor quality of work. Although tenders to appoint a replacement contractor were invited in February 2009, by 30 June 2009, which is more than two years after the contractor was terminated, a replacement contractor had still not been appointed.

 

d) Contractors experienced cash flow problems which negatively affected progress on projects as they were unable to pay their suppliers, subcontractors and workforce. Late payments, which contributed to the cash flow problems, were made to the contractors by the provincial Department of Health or the implementing agents in the Eastern Cape , Free State , Gauteng , KwaZulu-Natal , Limpopo , Mpumalanga and North West provinces. The contractors were therefore not financially able to complete the projects.

 

The Committee recommends that the Provincial Accounting Officer ensures that:

 

a) Roles and responsibilities of the national department, provincial departments and implementing agents should be defined;

 

b) There is coordination between the different role players so that projects can be commissioned and utilised at first handover;

c) Project managers with proper skills should be used to ensure that proper planning and execution is achievable through adequate allocation of resources.

d) The number of technical staff and project managers required to effectively manage complex infrastructure projects should be scientifically established;

e) Project managers should conduct site inspections regularly and there should be effective monitoring of contractors. ; and

f) Penalties are instituted against contractors who perform poorly.

 

 

2.4 Commissioning and utilisation

 

The Auditor-General of South Africa raised specific concerns on the following and reported as follows:

 

a) Coordination and liaison between the officials at the provincial departments of Health and Public Works or the implementing agents was insufficient to ensure that newly constructed hospitals, clinics and health centres, or sections thereof, were used optimally at the time of commissioning. In the Eastern Cape , Free State , KwaZulu-Natal , North West and Western Cape provinces , insufficient synchronisation between the times of commissioning, the appointment of staff and the availability of certain equipment and services led to the hospitals and clinics not being used optimally. The following serve as examples:

 

· At the Winburg and Brandfort clinics in the Free State , the planned completion dates for the projects were 6 September 2005 and 26 September 2004 respectively. However, occupation only took place during June 2008, which was more than two years and nine months after the planned completion dates. During 2009, it was noted that the clinics were still not fully utilised due to staff shortages and a lack of certain equipment.

 

· At three facilities in KwaZulu-Natal , projects were completed and furniture and equipment delivered, however, the facilities were not used immediately as staff was not made available by the provincial Department of Health. Although a unit within a facility was completed on 18 September 2007, it was only commissioned on 6 January 2009, which is 1.4 years after its completion.

 

b) Purchasing equipment for infrastructure should be coordinated to ensure that it is available for installation at the appropriate time during the construction or commissioning of the facilities. In the Eastern Cape , Gauteng , North West and Western Cape provinces , equipment to the value of approximately R12,5 million was purchased by the provincial departments of Health but could not be used due to the late completion of the projects by the contractor. The following serve as examples:

 

· Although the planned completion date for the laundry section at the Komani Hospital in Eastern Cape was 17 April 2008, the section was still not complete as at March 2009. An assessment by a second contractor indicated that it would not be viable to complete the project due to substantial defective work. This resulted in laundry equipment, amounting to R4,9 million being stored in an unsecured, uncovered area within the hospital complex. Furthermore, the hospital management decided to outsource a portion of the laundry service, As at 21 June 2011, the project was at a standstill as a new contractor had not yet been appointed.

 

· At the Kalafong Hospital in Gauteng , equipment to the value of R5,8 million was purchased by the provincial Department of Health during January 2008 for use in the ICU and High Care facilities. The use of some of the equipment had to be delayed as the project was still under construction on the date of delivery. The project was completed in November 2009, which is almost two years after the equipment was purchased. Some of the equipment was in storage at the hospital and the warranties had already lapsed before the equipment was used.

 

c) In the Eastern Cape , KwaZulu-Natal , Limpopo and Western Cape provinces , projects that were completed had facilities standing unused or used for other purposes, such as a storage place for equipment. Some facilities were not operational owing to funding constraints, which delayed the training and/or appointment of the required staff.

 

 

· At the George Hospital in the Western Cape , the maternity theatre, day care ward and the restaurant were unused for up to six years. The handover dates for the restaurant, theatre and day care unit was 2002, 2004 and 2005 respectively. The estimated cost of the unused areas was R8,7 million. In August 2009, the provincial Department of Public Works was in the process of leasing the restaurant area to a private service provider.

 

The Committee recommends that the Provincial Accounting Officer ensures that:

 

a) Unutilised or underutilised facilities should be identified, recorded and investigated to determine whether it can be effectively utilised to promote service delivery;

b) Leadership oversight during all phases of the infrastructure delivery process should be strengthened;

c) Proper coordination of projects between role players should be ensured;

d) Project management approach to be strictly adhered to so that completed projects are utilised for intended purposes; and

e) Proper disciplinary action should be taken against employees who neglect their duties and waste state resources.

 

3. Conclusion

 

The Committee appreciates the sampling methodology used by the Auditor-General in conducting this performance audit, however the departments and provinces should rectify its entire infrastructure projects even those that were not part of the sample.

 

The Department of Health must take an active oversight and monitoring role over all its planned and current projects in order to eliminate delays and to ensure compliance with supply chain management processes and subsequently improvement in service delivery. The National Department of Health must ensure that national norms and standards for infrastructure are developed and implemented. National Departments such as Co-operative Governance and Traditional Affairs, Public Works, the Public Service Commission and National Treasury must ensure that their respective provincial departments implement these resolutions as well as resolutions from provincial committees on public accounts.

 

The Committee recommends that the Accounting Officer submits a progress report on all the above recommendations to the National Assembly within 60 days after the adoption of this report by the House. Provincial SCOPAs should monitor progress on implementation of resolutions in their respective provinces.

 

The Committee further recommends that the Accounting Officer submits quarterly reports on all the above-mentioned recommendations.

 

 

Report to be considered.

 

 

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