Compensation Fund and the Public-Private Partnership (PPP): Department of Labour briefing

Meeting report

Compensation Fund Challenges and Turnaround Initiatives: Department of Labour (DoL) briefing

Mr Nkosinathi Nhleko, DoL Director-General, said the Fund had historically faced challenges in delivering efficient and timely services to its stakeholders. These challenges were complex in nature as they were systemic and had existed for many years (Slide 4). These challenges were around the skills capacity of people in its employ, around organisational processes and around Information Technology (IT) systems, all of which impacted on its financial performance. He said there was a silo mentality with no shared vision of the business within the organisation, the business value chain was not adequately understood and there was a fear of change within the organisation. Organisational challenges had led to medical practices for example refusing to treat worker injuries. The Information and Communications Technology (ICT) systems were not user friendly and were too slow. There was a need to integrate all these elements into a whole.

Audit findings overview 2008/09 to 2011/12

Revenue management and debtors, claims, and bank reconciliations were the bases for a disclaimer in 2008/09 and 2009/10. Revenue management and debtors, and claims, were the bases for a qualification in 2010/11 and 2011/12, while bank reconciliations in these two financial years were reported as 'qualification cleared'. (Slide 6).

Audit analysis: areas of high concern

Details were provided under the headings of leadership and financial and performance management. (See slides 7-8).

Diagnostic review findings

Details were provided under the headings of strategic alliances and business capability challenges. (See Slides 10-12).

Interventions: short to medium term

In the short to medium term it had put in place a project team to look at what needed to be done and to develop a turnaround strategy. The terms of reference would be drawn up for a competent service provider to be appointed. There was a need to improve IT immediately and it would engage with stakeholders to obtain buy in. It had engaged for example with the Road Accident Fund (RAF) which had loaned the Fund a manager to assist with technical advice. (See  Slides 14-17)

Looking forward

Long-term interventions

Mr Vikash Sirkisson, Compensation Fund Chief Information Officer, said long term interventions could be broken into strategic and operational projects. There was a need to better define fraud, risk management and improve service delivery controls. To this end it was embarking on a skills audit and change management. It needed to finalise revenue and debt management strategies and develop an ICT strategy and modernise its IT equipment. (See Slide 19)

Ideal Value Chain

Ideally the primary business of the Fund was to generate income, pay out claims, and manage the rehabilitation of claimants. These functions were then supported by common back-office support services that included human resources (HR), finance, procurement, information technology, governance and compliance, and risk and audit. (See Slide 20)

Critical success factors

These included: the project should be owned and reported directly to the Director-General. A dedicated project team should be appointed. There should be external expertise on the project team. There should be communications and interactions with all stakeholders. The governance process must be followed, for example, supply chain management (SCM). There should be buy-in and acceptance by stakeholders. There should be continuous change management. (Slide 22)

Discussion

The Chairperson requested that a copy of the Public Protector’s findings be made available to the Committee.

Mr A Williams (ANC) asked if there was a strategy in place to prevent the Fund from regressing to a point where it again received qualified audits from the Auditor General. He wanted regular updates from the Fund.

Mr D Kganare (COPE) asked how the excessive use of consultants would be dealt with. He asked why the Fund was still manually processing claims paperwork leading to long delays when an expensive IT project had been implemented. He asked if the new dedicated project team members, to oversee the turnaround strategy, were part of the Compensation Fund or people from outside it. He speculated that it was possibly not the systems at issue but rather people operating the systems who could be corrupted.

Mr S Motau (DA) said that the matter raised by the director general was not new, that the organisation appeared dysfunctional and that the project team had to report what would be done to correct matters.

The Chairperson said he was concerned over the accuracy of the figures presented in the Fund’s documents around revenue and debtors. How much was in the coffers of the Fund and how much was owed to how many people?

Mr E Nyekembe (ANC) said the Commissioner had been appointed in 2009 to rectify what was wrong with the Fund. Why was there a new strategy and what was wrong with the old strategy? He said R12m had been spent on fruitless and wasteful expenditure, an increase of R10m from the previous years’ figure of R2m. Were people being employed to deal with the backlog in cases?

The Chairperson asked how many functions had been outsourced, to whom and for how long.

Mr A van der Westhuizen (DA) was concerned that the Fund had dropped the rate it processed claims from 1 500 to 1 000 per day.

Mr Nhleko said that then Public Protector Adv Lawrence Mushwana’s report was released in 2009 and was in the public domain. He added that Advocate Thuli Madonsela, Public Protector, had made a follow up to that report. He said the new strategy was one that emphasised a hands on approach by the leadership over the process of change within the culture of the organisation. The extent of the challenge facing the Department was being identified through an outsourced forensic investigation into the Fund. The project team were people drawn from various Fund divisions.

The Chairperson asked what actions had taken place in the past six months.

Mr Brian Leshnick, Compensation Fund Acting Chief Financial Officer, said the Fund was a viable concern with investments of R30b and claims totalling R16b and with accumulated reserves of R14b. He said there was a declining trend in the amount of claims being processed.

Mr Nhleko said there was concern around major service providers like hospital groups with some of them saying they would not be providing services. He said the Fund had challenges arising from its Systems, Applications, and Products in Data Processing) SAPS IT systems. In the last six months systems had been improved and a portal had been designed and was in the testing phase. There had been an increase in medical payment pay-outs and in the last five weeks it had paid R250m in claims. Consultants used by the Fund were: Comptron to assist with data migration; KPMG contracted to do a skills audit and training of personnel to have the skilled people using the correct systems; Alexander Forbes Consultants & Actuaries who assisted in assessing data as and when needed and who also provided investment advice, and C.A. Scott Consulting Actuary who worked on claims assessing life expectancy to determine pay-outs.

The Chairperson asked what the financial unit of the Department was doing, why did the Department not have the skilled financial capacity and how many KPMG employers worked in the Department.

Mr Nhleko said the Fund did not have a CFO and that a consultant was acting as a CFO, as at one stage the Fund could not produce monthly statements. The acting CFO had been appointed ten months ago.

Mr Van der Westhuizen wanted the assurance that the number of claims and payouts would increase in the future.

Mr Nyekembe asked how far the initiative to rehabilitate workers and not have them dismissed was.

Ms L Makhubela-Mashele (ANC) asked the Commissioner what had gone awry after the Commissioners appointment and commitment that he would do what was necessary to correct matters. She asked him what stopped the Fund from using medical aid systems to process claims.

Mr Shadrack Mkhonto, Compensation Fund Commissioner, said that the trend was towards improvement but that there had been challenges in the previous year in the area of finance management. The Fund had requested the assistance of the director general in getting a CFO for the Fund. Staff capacity in this field was also a challenge and one of the tasks of the CFO was to ensure that the Fund had properly qualified staff.  There had been improvements with employers submitting returns online. The major cause of problems was the IT systems where the Fund still had problems with its service provider. The director general had approved initiatives to reward employers who used the web with a 5% discount. Other challenges were data capturing errors which delayed processing and the need to increase bandwidth. He said amendments to the legislation would be drafted and once the Bill had been finalised would be handed over to the Department.

Ms Makhubela-Mashele questioned whether top management should not be replaced.

The Chairperson said there were thousands of poor and disadvantaged who depended on the payouts.

Mr Nhleko replied that the Fund was financially sound despite the problems it was encountering. He said the claims processing was on-going and not dependent on the turnaround strategy being implemented. He said the terms of reference for the forensic investigation through outsourced consultants was being finalised. He said the replacement of executives would need to follow a specified process and the forensic work that was envisaged would assist in identifying the problem and its extent. The cost of the forensic investigation would be informed by competitive bidding.

Public-Private Partnership (PPP) and ICT Strategy

Ms Lerato Molebatsi, DOL Deputy Director-General: Corporate Services, said lessons had been learnt from the PPP contract that the Department had entered into with Siemens in 2002. The ten year contract was terminated in November 2012 and termination support to run the programs was in place while the Department looked for a new service provider. There had been too much reliance on one service provider for all its IT needs. Siemens had developed only three out of 18 projects satisfactorily, while a further three projects partially met requirements. It was meant to develop an operational strategy for the Department; consequently the last ICT strategy of the Department had been drafted in 1998. The Department was appointing new vendors to provide much need services, was in the process of recruiting critical staff and was seeking to modernise infrastructure in the short to medium term. She said lessons learnt from the Siemens PPP contract was that governance structures needed to be functional, contractors should not be left alone to manage themselves, skilled internal capacity had to be employed to manage the contracts and clear contract principles, especially on the financial side, had to be developed and the Department needed an approved IT strategy which included looking at forfeitures.  (See presentation document)

Discussion

The Chairperson asked if the IT systems were used by all entities in the Department.

Mr Williams asked what mechanism there was to assist the Department in the drafting of contracts beneficial to it.

Mr Nyekembe said that the IT contract entered into ten years previously had only yielded three out of the required 18 software applications. What guarantee was there that the new strategy would deliver internal capacity? The Committee needed a comprehensive report on the winding up of the Siemens contract. Where did the company EOH fit in?

Mr Van der Westhuizen said he was upset that Accenture had been appointed without an open tender process. When would the EOH contract end? He was looking for assurance that the Department would take control of the IT systems.

Mr K Manamela (ANC) said people who had been negligent in respect of the old IT contract needed to be held accountable. He asked if the State Information Technology Agency (SITA) had been approached for assistance.

Mr Motau said that the PPP relationship which had been described as “less than successful” was better described as a failure.

Mr Nhleko replied that the PPP was the very first one entered into by government and that there were no examples to assist it. The PPP contact had led to the decimation of the IT capacity of the Department as one service provider, Siemens, had provided the hardware, developed the software and provided the skills training to the Department. Since April 2012 the Department was developing an approved ICT structure and had started the recruitment process to fill IT posts. The one year EOH Holdings Ltd/Siemens contract was not a new appointment of an IT service provider and was not outside of supply chain management, it arose out of a clause in the contract that upon termination the Department would still get one year’s technical support. The Accenture contract was specifically to assist the Department in the exit and take-over period.

Ms Molebatsi said that the IT systems were a Department wide resource. She said the Department was addressing the capacity of the Department to enter into contracts beneficial to it. The IT Department provided services to other departments also. She said SITA itself had had capacity problems, was also using consultants and had embarked on a turnaround strategy also. SITA was involved and assisted with some projects and the Department wanted to extend this engagement. She appealed to the Committee to be aware that some of the ICT change processes would take long. PricewaterhouseCoopers (trading as PwC) would begin the bidding process for new suppliers in one month. EOH was monitoring operational services till the end of November. EOH had the contract because Siemens had ceded it when it had divested itself from the IT business by selling Siemens IT services to EOH.

Mr Manamela asked what the role of Accenture was.

Mr Van der Westhuizen asked if it was true that the Minister was concerned with the EOH contract and wants to suspend it.

Mr Nhleko said the Department was developing a defined IT plan with Accenture and neither Accenture nor SITA could be party to the Siemens contract. He said that the Minister had directed that the EOH/Siemens termination support agreement be suspended. The Fund was busy dealing with processes to contain the negative impact of such a move.

Mr Manamela asked why this had been done and if there had been impropriety, that it be investigated.

Mr Nhleko replied that in December 2010 the Department had tried to pull out of the contract and commissioned a report into the original contract by KPMG which had recommended strongly that the Department not take the route of legal action and rather go for a negotiated settlement. He said he was not in a position to give the reasons for the decision. On the way forward he said that they had had around two million documents unprocessed and that under the termination support period EOH was assisting the Department reduce the serious backlog in medical claims leading to medical service providers refusing to provide medical services. In a period of four to five weeks the backlog had been reduced by 47%.The Chairperson said that the Committee would draw up a list of questions by the following Wednesday for the Department to respond to.

The meeting was adjourned.