Deviations & expansions at National Treasury Quarter 1 & Eskom Quarter 2 2020/21

Meeting report

Expansions and deviations for national departments & entities Quarter 1 & Eskom Quarter 2 2021/22
Mr Molefe-Isaac Fani, Acting Chief Procurement Officer, referred to Treasury's Supply Chain Management (SCM) Instruction Note 3 of 2016/17 to prevent and combat abuse in SCM.

There are three different contract modification types: Extension of Contract/purchase order, Expansion of scope in Contract/purchase order, and Variation of Contract/purchase order.

Deviations for Q1
In the top 20 national government institutions, there were 68 requests (92.39%) for deviations of R5.5bn, and 72 requests (99.67%) for R15bn contract modifications. Eskom had the most requests for modifications with 24 requests. Of the total of R5.5bn in requests, the Department of Water and Sanitation (DWS) made a request of R1.1bn and Eskom made a request of R685m. On the top 20 deviations application in numbers, Eskom made 6 applications and Treasury made 5 applications.

Treasury supported 10 of the submitted deviations to the value of R371m, and did not support 18 deviations to the value of R1.9bn. 31 submissions were supported with conditions attached to it. The conditions varied such as fulfilling certain requirements before or after the order had been placed. Two submissions were closed due to information not provided which resulted in the file being closed.

Contract modifications
The value and number of all contract modifications supported and not supported by Treasury were provided. A total sum of R15bn was requested for contract modifications. 72 requests from the top 20 government institutions were sent to Treasury for support, and 92 requests came from the other 52 government institutions. Eskom had the highest request for modifications with a total of R13bn, followed by Treasury. Eskom had 24 requests for modifications which was the most requests from the top 20 government institutions.

Eskom deviations and contract modifications for Q2
Eskom’s submission was approved with conditions at R36m, and two submissions were not supported at R10m with a total of 3 deviations submitted.

Eskom submitted 4 modifications conditionally supported at a value of R859m, and two submissions not supported at the value of R6m. This was a total of 6 requests for modifications to the value of R865m.

Common reasons for deviations and expansions
Mr Fani explained the main reasons for the deviations and expansions. The majority was due to a single source or sole supplier. There seemed to be a move towards Accounting Officers requesting Treasury to approve single sources as they do not want to go out on tender to test the market. There was also an element of Accounting Officers not understanding that they could outright approve sole supplier or Original Equipment Manufacturer (OEM) because the regulations allowed them to approve the use of OEMs. This meant that they did not have to approach Treasury to request that approval. If Treasury received such a request, it would inform the Accounting Officer of his/her authority to appoint OEMs as sole suppliers. Barring this, single sources would approach Treasury for support.

Treasury also saw several closed bid processes – this was where organs of state would request Treasury to give it approval to go to specific suppliers to request bids. The challenge with this was if there were other potential suppliers who could participate in that process, the process may be found wanting. Treasury was very hesitant as for every submission put forward, it would apply its mind and consider carefully each matter.

There was an element of business continuity where the department/entity believed that if it did use the supplier it had at the time, there may be break in service and business continuity. Several of these submissions were received but Treasury applied its mind to ensure there was an element of fairness or that the design of the procurement process did not lead to the perpetual utilisation of the one supplier. When Treasury identified such an instance, it would not support this.

On business strategy/operations, there were instances where Eskom had embarked on a business or an operational strategy to change how it operated. When this came through, Treasury and especially the OCPO, looked only at the procurement strategy and not the business strategy. However, in considering the procurement strategy, Treasury recognised that organisations went through renewal processes and that the procurement strategy needed to correspond to the renewal process. Treasury applied its mind on what was presented to it. In the absence of any documentation submitted where it was unaware – through other forums, media or other engagements of the business strategy change – it would interrogate only the procurement strategy that was presented.

The majority of the reasons were service delivery urgencies. Treasury recognised the impact of the breakdown in service delivery, and it focused to ensure that this was avoided.

Where Treasury had conditional approval of the deviations and modifications, it focused on addressing these trends in the application processes.

Trends and observations
Mr Fani unpacked the trends and observations in applications on Slide 22.
• Organs of state were not keen on following procurement processes as some indicated that these processes were too tedious. Treasury observed that procurement processes were left to start too late which resulted in these organs seeking Treasury’s approval to depart from the normal procurement process. However, Treasury did not easily accede to that unless it impacted on service delivery or was an impact to the fiscus.
• The continuous modification of contracts was a challenge that Treasury was trying to manage. Continuous modification indicated the perpetual utilisation of single suppliers at the exclusion of others. Treasury analysed this and monitored the trends to ensure that organs of state that were perpetually utilising same suppliers understood the impact of this. If Treasury did not have to support that perpetual utilisation, it would analyse this and do so accordingly.
• Increasing audit disputes was also becoming a trend.
• Poor procurement planning and poor governance structures where items were not approved timeously would often lead to Treasury having to approve deviation or modification of contracts.
• Non implementation of consequence management on officials who cause irregular expenditure.

Operational challenges and remedies
Treasury was ensuring that it eradicated operational challenges.
• Manual processing of requests/applications was one of the challenges. Treasury was embarking on automation of its processes – both upstream and downstream, and engaging with Integrated Financial Management System (IFMS) to expedite the implementations. This would ensure the implementation of the SCM model in government as a whole.
• On insufficient capacity resulting in delays in processing requests from organs of state, the volume of deviation and modification work Treasury received at times become unbearable. Every request for modification, deviation, as well as for condonation of irregular expenditure, including appeals, all added to Treasury’s workload.
• Other operational challenges were that organs of state, in its SCM functions, were sometimes hesitant to apply its mind and use the prescripts at its disposal. Treasury was inundated with requests for clarification which created a bottleneck in its operational efficiencies. However, it was trying to address this in its automation processes.
• On the inadequate, incorrect, intentional or negligent supply of information in applications to the OCPO, Treasury would often have to prompt the organ of state to provide more information. This often led to the delays in the finalisation of the submission, especially technical requests. For example, a 10-page document would include technical jargon without actually including the procurement essence of that application so it could be considered. Treasury could then focus on the variations and deviations put forward. While Treasury had one or two technically strong individuals in its team to interrogate some of the work, it often did not have the capacity to do this.
• The inability to design and implement proactive measures to minimise abuse of SCM system and non-compliance was a challenge. Treasury’s automation process would assist it with this challenge. Currently, when it received a submission, Treasury would have to consult its excel spreadsheet to verify if the matter had been submitted before. However, it had a success rate of about 90% in verifying duplication or if the matter was previously submitted. When one or two slipped through, Treasury’s automation efforts would assist it in this.

Discussion
Mr S Somyo (ANC) said Treasury had indicated a list of questionable processes initiated by various institutions of government. On mitigation and to avoid such to and fro of information for deviations, was it possible for Treasury to require each entity to provide it with a procurement plan in accordance with the annual needs of such institutions? This would close off some of the questionable applications for deviation.

AGSA had indicated that the submission of irrelevant information created challenges and that the actual outlook would therefore not correspond with the application details sent to Treasury.

He said Mr Fani cried foul about Treasury’s capacity as it was quite clear that many applications would pass through it. The lack of capacity would therefore impact its ability to finalise applications.

Mr Fani replied that Treasury received the procurement plan from all organs of state. Every submission put forward was tested against the procurement plan submitted. Where Treasury noticed a deviation in procurement that the organ of state wanted to embark on which was not on the procurement plan, Treasury would make it aware of this. Treasury would request it to update its procurement plan accordingly. He confirmed Treasury would receive progress on the procurement plan twice a year, and it had a success rate of about 80% on the submission of progress on the procurement plan. It was working to ensure compliance to this. The procurement plan provided an indication if there was a plan for that acquisition. If a deviation was required, Treasury would gauge on what was planned from a financial point of view for that acquisition.

He directed Members to look at the numbers that were supported conditionally, and those supported unconditionally. There was merit in most of the applications Treasury received as environmental or supply conditions may change. He had referenced that organisations may have a renewal process or a change in strategy which may necessitate an expansion of the current work. Treasury was assessing every situation, and it had a closing of the loop with AGSA through the Treasury condonation process for irregular expenditure incurred by an organ of state. However, Treasury was able to pick up the trends through the condonation process, and if there were controls within an organ of state or generally within government based on the number of condonations it was receiving. The automation of Treasury’s processes had categories to track and draw graphs of what it viewed as trends. At the moment, however, everything was done manually which did not work in Treasury’s favour.

Ms N Tolashe (ANC) sought clarity on the inundation of questions Treasury received from heads of departments (HODs) who were unclear about the expectations of their role. In view of the work and the capabilities HODs were expected to maintain, how could HODs not understand their role and needed to ask Treasury to confirm their capacity to resolve issues? In what percentage of departments was this happening?

Mr Fani clarified that the Accounting Officers requested and were provided the interpretation of prescripts or they have their SCM functionaries support them in SCM processes to make informed decisions. The major issue was that irregular expenditure had paralysed SCM functionaries to some extent. Hence, the increase in the request for Treasury to confirm the HOD's interpretation of the prescripts. It observed this increase and attributed it to HODs not wanting to incur irregular expenditure due to wrong interpretation. When Treasury reviews the regulations after Parliament passes the Public Procurement Bill, it would ensure that its regulations were clear and that what should happen within organs of state was absolutely clear. This would avoid Treasury getting inundated with requests. He clarified that it was mainly the SCM functionaries that sought clarity, not necessarily the Accounting Officer. However, he presumed that this was because the Accounting Officer wanted to be certain that they would not cause any irregularity in the procurement process. Unfortunately, the inundation caused inefficiencies in Treasury’s operations, specifically on Instruction Note 3 of 2016/17.

Ms Tolashe said the response was quite vague as she expected Mr Fani to highlight where the problem was. While she understood his response, she believed that the Accounting Officer was ultimately responsible despite receiving guidance from SCM. She was concerned that Treasury was overloaded by these interpretation requests that were supposed to be done by the department or entity itself. This was shifting blame which exposed the insufficiencies of those departments, the HODs, and the Accounting Officers.

The Chairperson added that the trends on Slide 22 gave a clear indication of where the problems were. The increased departure from the competitive bidding process, continual modification of contracts that retained the same service providers and disputing audit outcomes were all red flags. There was an endless list of reasons for expansions and deviations which were continually used as the norm rather than the exception. He recognised that some of these were partially flagged in Slide 23 but Slide 22 in its entirety was an indication of the brazen approach to circumvent due process and reach a level of ease to get things through. He proposed the need for a broader solution oriented discussion with Treasury, working with AGSA and law enforcement agencies, as it was precisely within these areas where criminality and maladministration could arise. He gave the example of the non-implementation of consequence management for officials who caused irregular expenditure in the South African Post Office which SCOPA dealt with yesterday. Members would recall the audit outcome and the poor governance structures in effect.

The Chairperson said he was struck by these trends as things were clearly not improving and he was certain that Covid-19 would be used as an excuse for the rise. He asked Mr Fani to address Slide 22 and explain how it would mitigate and resolve those disputes. Going forward, he proposed that the Committee should receive a breakdown of those who increasingly departed from the competitive bidding process so it could clearly understand where those trends were found and target the correct transgressor.

He emphasised his concern about the trends in procurement and agreed with Ms Tolashe’s comment on the responsibilities of the Accounting Officer. Slide 22 highlighted the underlying issues which all required attention. He proposed that the Committee should be briefed in detail on all those points in its next engagement.

Mr Fani asked Ms Duikers to address Slide 22 and he would add to the analysis that her team had made. All the submissions for variations or modifications from the Accounting Officers would either seek a single supplier or a closed tender. In Treasury’s analysis of the rationale for a single source or a closed tender request, it discovered elements of those were very predominant in the submissions received. He was grateful that at this stage, Treasury had Instruction 3, 16, and 17 to assist it so that it could analyse every deviation or modification request and focus on either support or to give conditions to it. Those that Treasury rejected outright conflicted with what could be a variation or a modification, but Treasury would address those. Poor planning was one of the single contributors to those trends. He explained that this could be due to delays in the start of the process by a specific individual, or delays processing documentation required for procurement to start to happen. In the case of irregularities on this basis, consequence management did not seem to be taken seriously by Accounting Officers when they submitted their condonations for the irregularities incurred due to procurement non-compliance. Treasury took these matters seriously but it was only in a position to analyse what it received. In its monitoring processes, it also picked up some elements of this.

Ms Basani Duiker, Chief Director: Office of the Chief Procurement Officer, National Treasury, added more details on the trends on Slide 22 which highlighted what led to departures from the normal procurement process. Poor planning was possibly the main root cause because Treasury observed that institutions failed to conduct adequate market research, as well as to identify appropriate procurement strategies and methods to procure goods and services required for service delivery. This led to poor drafting of specifications which resulted in non-responsive tenders, cancellation of tenders, or tenders that were non-compliant with prescripts. If planning was done properly and adequately, Treasury was supposed to see where it was impractical to go out on tender for procurement when Treasury received its procurement plan. If the institution had done adequate market research that indicated, for example, if there was only one supplier in the market or if there was insufficient capacity within the country to get such services. Since this was not done properly, those things did not come through in the procurement planning.

Ms Duiker agreed that Mr Somyo was correct about the mitigating strategies to respond to these challenges within government. However, with the incomplete work in government to plan and adequately research for procurement, this simply did not happen. The procurement plan indicated a tender was supposed to be implemented in a specific quarter but challenges would arise since there was inadequate planning for procurement, this meant that the implementation of the procurement plan failed. Failing to implement the procurement plan meant that goods and services would not be acquired that were required for service delivery. This then lead to the solicitation of the easiest way to procure since the tender process had failed. This was where Treasury saw deviations emerging – the procurement plan would show where there was supposed to have been a tender. If a tender had been cancelled two or more times, including the time it took to finalise procurement, was a significant contributor to this.

As part of these trends that Treasury had observed, Members would notice quite a high trend in cancellation of tenders. Institutions would then approach Treasury to inform it that it had to deviate, shorten the bid or go on a closed bid, or that Treasury should appoint the service provider it had identified through a certain process. In some cases, Treasury would have to consider the service delivery South Africans were supposed to be receiving from that particular department.

Availability of information was one of the most concerning trends. Ms Duikers said that institutions were not always upfront with information as mentioned by the Chairperson. In most cases, Treasury had to request information or clarity, attend meetings to request additional documents, analyse documents given and request more. Those were some of the reasons for Treasury’s protracted process to respond with a decision. Treasury assessed these critically and tried its best to ascertain a solution-driven outcome as it wanted to be supportive and enhance the state’s ability to deliver on services. However, compliance, following proper procurement processes and not circumventing SCM processes was also critical. It was important that these challenges were resolved within the departments themselves in having a capacitated, skilled SCM function. This would enable Treasury to deal with justifiable reasons for deviations and contract modifications for the purposes of service delivery.

On the trends and observations, it was important to note that institutions took protracted timeframes to implement and sat with problems that should have been resolved internally. Whenever Treasury did not support a deviation request because it was not justifiable or because it failed to plan, implement the procurement process, or to manage contracts properly, it would then be taken as Treasury caused the failure for the institution to deliver services.

Mr Fani added that one of the responsibilities of Treasury and Accounting Officers was to ensure that government functioned properly and that there was no dependence on a single supplier, or the perpetual utilisation of a supplier at the detriment of the organisation. Treasury intended to avoid an instance where government was unable to deliver on its mandate because a specific supplier had absolute autonomy in the functioning of the organisation in the services and goods that it provided to the organisation. It should ensure that the market uptake of all the suppliers happened so that other suppliers could have an equal opportunity to enhance the capabilities that government required to perform its duties, and to ensure that service delivery happened at the appropriate rate.

There were some Accounting Officers who constantly requested the perpetual utilisation of a supplier. However, when Treasury asked specific questions and required specific technical validation of that perpetual utilisation of the supplier, it would not find an answer. In SCM in the OCPO there were researchers that would research the market to get an understanding of the market trends for a specific supplier. Treasury would confront the Accounting Officers where perpetual utilisation of a single supplier was encouraged. Treasury would then not support that perpetual utilisation. Unfortunately, since processes were not started on time for organisations to acquire the goods that it required, Treasury had to give a conditional approval for the sake of service delivery to happen as well as for business continuity. However, Treasury noted such instances were fraud and corruption could emerge in the perpetual utilisation of suppliers. Treasury was trying its best, with information at its disposal, to root out this.

The Chairperson said this was where he fundamentally had a problem. The engineering of a crisis and the citation of service delivery as being negatively affected had been raised in the past. The Committee discussed this with the previous Chief Procurement Officer but there had been no improvement to date in preventing the abuse of expansions and deviations. This matter should be settled by Treasury. He advised Treasury not to let its conscience be played with to approve under duress as this is what fundamentally created the perpetuation of abuse of expansions and deviations on the one hand. On the other hand, it was the lack of consequence management. Treasury should be firmer because conditional approvals were a flexibility which was inconsistent with due process. Treasury needed to be firmer, sterner, and it should revise this process. The Committee should assess this and invoke some sort of intervention in the form of guidelines of its expectations from Treasury in streamlining expansions and deviations.

The Chairperson said this was totally unacceptable as he recognised Treasury’s patriotic moral obligation to overlook this due to risks attached in not approving some of these. However, more importantly, it does not assist the country or financial management if loopholes take precedence over due process. Treasury should really push back on this because these trends were not decreasing, yet this matter had been discussed ad nauseam. Treasury should address this and expose these elements within organs of state where this process was being abused. Unpacking this in more detail would expose what was happening within each department and institution and from where poor procurement planning emanated so the Committee could address this.

The Chairperson said he was not satisfied and this was something the Committee should apply its mind to. He invited Mr Fani to address Slide 11 on the top 20 deviations in Quarter 1 to illustrate the concerns raised.

Mr Fani replied that Treasury had indicated only the top 20 deviations received. He proposed that Treasury could provide more details in its next quarterly submission on applications for deviations and modifications so that the Committee could appreciate which departments had made the applications. Slide 11 did not indicate the type of deviation but Treasury would provide those details in its next submission.

The Chairperson agreed that Treasury should provide those details so the Committee could assess them with more detail. Has Treasury ever made a recommendation for consequence management in its conditional approvals for dereliction of duty in failing to manage contracts or procurement correctly since this could hinder the country and lead to a possible collapse or problems. It was understandable that Treasury’s approval was intended to prevent a calamity but did this approval come with a recommendation for consequence management as failing to manage contracts or procurement correctly was a dereliction of duty. He emphasised that something had to be done so Treasury could gauge the consequence management response of those responsible for this.

Ms Duiker confirmed that Treasury did implement such when it approved some deviations with conditions, especially the kind of deviations that emerged because a tender was cancelled for reasons not allowed by law and therefore not justifiable. In other instances, a tender would be cancelled as its validity period had lapsed while the institution was not aware so the institution would go for deviation since it could not award that bid. Treasury identified those elements within the requests as well as elements where there could be fruitless and wasteful expenditure. It raised that in its response and it implemented conditions for the assessment of such fruitless and wasteful expenditure, as well as consequence management that needed to be effected. Additionally, when the institutions approached Treasury for contract modification or deviation in a bid to resolve irregular expenditure declared by AGSA or Treasury. The institution would approach Treasury to request a deviation to implement a new contract but continue with the same service provider. These instances removed the opportunity to follow the Irregular Expenditure Framework that required clear action for consequence management, a clear determination and tests to assess if there had been loss or value-for-money to the state for that particular transaction. These were important aspects Treasury had to consider and address in its responses to institutions.

The Chairperson said he was satisfied with the response. He asked Treasury to provide samples from 2019/20 and 2020/21 where consequence management was recommended as a prerequisite to the approval so that the Committee could directly follow up with these departments and entities. The Committee did not want cosmetic recommendations. It did not want a situation where everything else was overlooked once the approval had been granted as this created a cycle where Treasury approved under duress simply to avoid another calamity. This would then lead to the recommendation of consequence management but this was not focused on. Since the request may be a difficult task, the Chairperson gave Treasury 14 days to submit this information.

What were the circumstances of Eskom's Econ Oil matter? Was there an update on this?

Mr Somyo said several of these matters emerged from post facto applications which increased irregular expenditure for entities. Consequence management would be the responsibility of the Accounting Officer. He implored that post facto applications be looked into. This would be much simpler and save time, and the judgement of these matters. The speed of the decision-making process was very important as consequence management should be visible. Assessing these post facto applications would highlight if the departments had already spent money and procured a service before it appealed to Treasury to approve this. How could the Committee ensure that the decision to approve or decline was timely? This would enable Treasury to create its own list of these anomalies that led to non-approval of deviations. This could also feed into AGSA to address the determination of irregular and fruitless and wasteful expenditure.

The Chairperson thanked Mr Somyo for his constructive and progressive intervention. He handed over to Treasury to address the questions and concerns.

Mr Fani responded to the question on Econ Oil. Treasury allowed the processes that Eskom was embarking on to evolve, but it would have an intervention with Eskom at an appropriate time. The matter was litigious in nature hence Treasury had allowed Eskom an opportunity to address the matter. However, its review processes would certainly point it in that direction as well.

He noted Mr Somyo’s comment that the speed of approval of submissions was key so that Treasury did not render Accounting Officials and organs of state into irregularities. This was something Treasury was considering. However, as Ms Duiker had indicated, the unavailability of information provided to Treasury at the onset was critically important for Treasury to resolve matters timeously. On average, Treasury was considering ensuring that it addressed matters of a critical and intricate nature within two weeks, and within one week for smaller matters that were only one process direction. Delays in submission of requested information, or where information is not submitted at all, was the biggest barrier for Treasury to make a conclusive and timely decision.

The Chairperson said the Committee should have an engagement with Eskom as it had about 24 contract and modification matters. He commented in his vernacular language [1:15:10]. It had been going back and forth with Eskom for a very long time. He asked why Eskom was always foremost with expansions and deviations. He noted Treasury often approved those modifications, expansions, and deviations to “avoid” calamities, yet load shedding continued. The interventions for flexibility were made, but the situation was not improving. The contradiction was glaring because Treasury approved applications to avoid the obstruction to service delivery in the provision of electricity, but there was still an increase in load shedding and blackouts. He was unclear where the fault line was. What was the progress on this matter? How did it arrive at this situation with Eskom? Was this a matter that the Committee needed to discuss with Treasury and Eskom to move forward? Something was wrong at Eskom.

Ms Duiker noted that in the discussion on trends, she had mentioned that several deviations and contract modifications were attributable to poor planning and failure to implement procurement processes. Unfortunately, Eskom was not immune to those challenges. In Treasury’s engagement with Eskom, it had identified Eskom had challenges with contract management. Since contracts were not managed properly, the procurement process was either implemented late or cancelled. Therefore, a need for contract extension would then arise to ensure continuity of service while another process was embarked on to establish a new contract. In some instances, the establishment of a new contract would come in the form of a deviation and Treasury would then have to consider those kinds of issues.

She confirmed it was true that when Treasury considered Eskom, it also had to consider its ability to deliver on services. However, Treasury could not overlook any other concerns that existed within the Eskom environment such as the continuous and intentional use of the same service providers. Some were due to true and honest reasons and in those circumstances, Treasury would consider it and support Eskom where it found those reasons justifiable to ensure continuity of its services. However, in these departures from normal procurement, it was also critical to consider the root causes of these trends such as the percentage of compliance in the implementation of procurement plans.

She explained that there was a direct correlation between the number of tender cancellations within an institution, and how high this number was compared to the number of requests that went to Treasury for approval. Treasury identified that Eskom had quite a high number of tender cancellation and unfortunately this eliminated the opportunity to appoint suppliers or service providers through an open, transparent, and competitive process. This aspect should also be looked into as it was difficult for Treasury to consider since there is too much toing and froing between Treasury and Eskom – with Eskom trying to find the correct way to address its procurement challenges and Treasury trying to assist to ensure it continued to deliver its services.

The Chairperson thanked Ms Duiker for her honest response about the challenges.

He proposed that the Committee should note the concerns and reflect on these. It had provided commentary, observations, and some recommendation on this matter in the past but it should consider this matter holistically in light of the trends and observations. The Committee would support Treasury provided that it did the right thing and it implemented the laws and regulations, including its own Notes, correctly so that it could have a prudent, stable, effective and efficient financial management. He noted that certain people might not be comfortable with this as they believed that they were right. However, this was not about institutional or individual correctness, this was the law. Treasury was given the duty and the responsibility to be the adjudicator or referee in these matters, and the Committee therefore expected it to conduct itself according to its responsibilities. The Committee would flag all the issues for the relevant departments. Moving forward, it would have to focus on the specifics of how it intended to address these matters.

He thanked Treasury for its presentation and responses, and Members for doing their work as the Committee had an engagement and question session in the morning.

He reminded Members that Eskom would engage with the Committee on 23 November 2021. Members could prepare accordingly to flag these concerns with Eskom.

The meeting was adjourned.