Contract Deviations & Expansions 2019/20 Quarter 3: Office of Chief Procurement Officer

Meeting report

Ms Estelle Setan, the acting Chief Procurement Officer (CPO), National Treasury, presents the briefing report to the Committee. She informs the Committee that the applications for a new CPO closed on 27 January 2020 and they are currently in the process of shortlisting suitable candidates. She then moves onto the introduction for the deviations from the competitive bidding process. She says that the accounting officer/accounting authority must only deviate from inviting competitive bids in cases of emergency and where ap provider has sole supplier status. An emergency procurement may occur when there is a serious and unexpected situation that poses an immediate risk to health, life, property or environment which calls an agency to action and there is insufficient time to invite competitive bids. Sole source procurement may occur when there is evidence that only one supplier possesses the unique and singularly available capacity to meet the requirements of the institution. The accounting officer/authority must invite as many suppliers as possible and select the preferred supplier using the competitive bid committee system. Any other deviation will be allowed in exceptional cases subject to the prior written approval from the relevant treasury. Further, the Accounting Officer/ Authority must ensure that contracts are not varied by more than 20% or R20 million (including VAT) for construction related goods, works and/or services and 15% or R15 million (including VAT) of the original contract value for all other goods and services. Any deviation in excess of the prescribed threshold will only be allowed in exceptional cases subject to prior written approval from the relevant treasury.

There were a total of 235 deviation requests, with 74 of them being supported. 69 were not supported, 52 were noted and 40 received conditional support. The rand value of the deviation requests amounted to a total of R7,370,508,136.52. The rand value of requests not supported amounted to R4,909,837,909.84. The rand value of the noted requests was R1,194,141,670.70. The rand value of the requests that were supported was R648,005,765.28 and the rand value of the requests that received conditional support was R618,522,790.70. The institution with the largest deviation request in rand value was Transnet Limited, followed by Eskom. The institution with the largest number of deviation requests was the South African Police Service, with 28 requests, followed by Denel, with 17 requests.

There were a total of 223 expansion requests, with 108 of those requests being supported. 66 were conditionally supported, 43 were not supported, 4 were within AA mandate and 2 were noted. The rand value of all expansion requests was R7,582,401,343.10. The rand value of the requests that were conditionally supported was R3,979,046,436.80. The rand value of the supported requests was R2,155,930,871.92. The rand value of the requests that were not supported was R1,415,866,375.44. The rand value of the requests which were noted was R23,761,166.98 and the rand value of the requests within the mandate of Accounting Officers (AAs) was R7,796,491.96. The institution with the largest rand value in expansion requests was Eskom, followed by Transnet Limited. The institution with the largest number of expansion was the South African Revenue Service (SARS), with 16 requests, followed by Eskom with 10 requests.

The common reasons why deviations and expansions may be necessary are that of the sole supplier and/or single source for some of the contracts institutions have. There is also the issue of a closed bidding process which limits the market. The need for business continuity is also a reason and business strategy/operations issues were recently found in State Owned Companies (SOCs) with their turn-around strategies. There is also the issue of service delivery urgency, which leads to an increased number of requests. The extensions on current contracts due to new tender processes not concluded in time is also an issue which sees to many expansions and deviations. In addition, failed tender processes leads to the restarting of tender processes; there is also the issue of extension of accommodation leases. The continuation of using existing software is also a problem. There is further the issue of exceeding the 15%/R15m or 20%/R20m threshold for expansions (especially for SOCs with large projects). Government-to-Government Procurement (involving institutions such as the Government Technical Advisory Centre (GTAC) or the Council for Scientific and Industrial Research (CSIR) is also a reason that deviations and expansions are requested.

Some of the root causes of problems related to deviations and expansions include poor planning; inadequate market research and analysis; drafting of poor specifications and evaluation criteria; poor contract management; poor performance; resistance to change; lack of understanding of procurement legislation; the use of emergency provisions to enter into long term contracts; making deviations the normal way of procurement (as it is the easy way out). Ms Setan said that the Auditor-General’s approach to audits is not outcomes based, but rather a tick-box exercise which leads to the need for deviations and expansions. Finally there is a reluctance amongst some institutions to make their own decisions and they turn to Treasury to do this for them, by applying for deviations and expansions .

Comments by Members

Mr E Buthelezi (IFP) would like to know what is exactly is meant by not supported. He then goes on to say that the report was very empowering and he would like the presenters views on the internal controls used to prevent deviations. He would like to know if some deviations could have been avoided and which deviations, if any, were as a result of fiscal dumping. He further asks if there is any legislation regulating government-to-government procurement at national level, as there is at municipal level.

Mr A Sarupen (DA) would like to know if the office audits the specifications of contracts, especially with respect to single and sole supplier. He says that specifications can be used to keep some suppliers out of the market and sway a contract in the direction of s specific supplier.

Mr D Joseph (DA) would like clarity on what the supply chain management (SCM) can do to bring an office back on track; to make value for money. He is also concerned about the point made with respect to the Auditor-General’s approach which is not outcome based and would like facts to back up this claim made by the office of the CPO. He says that when the Auditor-General presents to the Committee, they give examples of the outcomes they have.

Ms E Ntlangwini (EFF) is concerned that there are too many deviations and expansions. She is further concerned with the public works expansion, with respect to electronic installations in Parliamentary complexes in Cape Town, as these things do not even work in the houses. She asks how oversight is undertaken when deviations are requested. She says that they would like the office to have oversight components and actually check up on deviation requests.

Mr Z Mlenzana (ANC) asks if there is a way to assess performance and get value for money from the contracts. He also asks if Treasury is doing anything to deal with the root causes of the deviations and expansions.

Ms R Komane (EFF) would also like evidence on the Auditor-General matter. She asks if the CPO looks for value for money on contractors employed on the various contracts. She also says that the office needs to get involved and check the specifications on contracts that renders some services sole or single supplier services. She further comments on how some things do not require tenders and the middle man can be cut by just procuring such items straight from the supplier, as tenders tend to open up the floodgates to corruption.

Ms E Peters (ANC) asks what the office is doing to minimise the root causes as well as minimise the number of deviations and expansion requests. She also asks what the relationship is between the Auditor-General and the office of the CPO. She also asks if there have been any repeat requests of the same nature. She asks if the National Treasury interacts with the executing authorities. She asks how many companies have been red-flagged for the purposes of not being eligible for contracts. How many red-flagged companies do they pick up in deviation and expansion applications from the different government institutions? Many of the businesses that have been red-flagged are still doing business with the government. She asks if they are able to reduce the red-tape with regards to procurement, especially to assist small businesses. She is also concerned with public servants doing business with government.

Mr X Qayiso (ANC) would like to know what is being done to remedy the root causes.

Mr Mlenzana asks if there are any follow-up mechanisms in place for those deviation and expansion requests which have not been supported as sometimes what the institutions do is take bigger tenders and break them up into smaller tenders, thus ending up with a supported deviation or expansion request which had initially been denied, so Treasury end up supporting the deviation or expansion either way.

Ms Komane would like to know what support is given to the various departments. She asks what is being done about the poor management in the various departments.

Ms Peters asks if the office has denied requests which later appear in the department’s overspending figures, thus having to condone the deviation. She asks if they refer matters for investigation and if the office has investigated anything.

Mr E Buthelezi would like to know what is meant by an unsupported deviation which has been finalised. He also asks why some of the finalised unsupported deviations have amounts while some do not. [He refers to an Excel spreadsheet distributed to members only].

Ms M Dikgale (ANC) asks if there are any awareness and monitoring programmes for those that are failing to get their requests supported.

Ms Peters asks if the office has the capacity to deal with matters related to the supply chain management issue.

The Chairperson says there needs to be a changed approach with respect to how they treat the office of the CPO. He says that this office is more than just deviations and expansions; they are the office of procurement and supply chain. He asks what the role of the office is, and would like to have the office of the CPO back to talk about their performance and to know whether the office knows what their role is.

He says he will need a list of all the blacklisted companies.

He says that the CPO need to make sure they are getting value for money with respect to their contracts as companies tend to overcharge government. He says that there should be a policy in place on the issue of conflict of interest and if there is one, he would like the Committee to be taken through that policy. He says that many of government’s issues stem from procurement and as such, it should be analysed adequately. He would further like to know what the process is in deciding whether or not to support a deviation. He comments on how in one year, Eskom was given R32 billion worth in deviations. He asks what is being done with respect to the poor planning, poor contract drafting and management. He asks what risks and concerns are associated with the government-to-government procurement and asks whether there is a time limitation with regards to how long a contract can be extended for as some have been running way longer than others. He says that a presentation on the Bill is needed from the office of the CPO. He is also worried about the issue of the sole/single supplier and how these suppliers are determined as new suppliers can come into the market at any time. He says it seems like a tool to keep some suppliers out of the market.

Ms Ntlangwini asks why the quotation process with respect to drones purchased by the South African Police Service, is confidential as the Committee needs to know what the deviations are for.

Answers from the Office of the CPO

Ms Busani Duiker, Chief Director of SCM Governance, Monitoring and Compliance for National Treasury, answers the questions posed by the Committee and starts off by explaining what each of the four responses to deviation and expansion requests mean. She says that supported means that they can go ahead with the deviation; conditionally supported means that they can go ahead with the deviation but under certain conditions; not supported means that the request has been declined completely and noted means that the deviation has already been done and the institution is just informing the office of the CPO of the deviation. With respect to the noted deviations, the office will still investigate the reasons for the deviation and report back to the accounting officers to state whether or not they agree with the deviation. They would disagree with the deviation if it does not meet the criteria for an emergency or the criteria for sole supplier, thus declaring it irregular expenditure. She says that with respect to the excel spreadsheet provided, the column which states finalised is for their own record keeping so that they able to see which matters have been finalised and closed. She says that the deviations which do not have amounts are the deviations which do not necessarily have an amount attached to it; for example when a department requests to shorten the time required to advertise a tender thus deviating for the prescribed 21 days.

She says that it is worth noting that the increase in the number of deviations does not mean that they have not been there all along. The reason why they seem to be spiked up now is because Treasury Regulation 16A(6) allowed for accounting officers to deviate from normal procurement processes in exceptional cases, which led to an increase in abuse of the system as well as corruption, thus leading to a mechanism being put in place to curb the deviations. They introduced the instruction note 3 of 2017 which states that accounting officers and authorities may now only approve deviations which are emergencies or sole supplier. Anything else must be brought to the National Treasury and so [more of] the applications now started going to the National Treasury.

The Chairperson then asks what the legal standing is of the note that they are talking about.

Ms Duiker says that is an instruction note which is mandatory and such departments have to comply with it. She says that with respect to the question of internal controls, the controls are not as adequate as they would like them to be. She says that over the years the irregular expenditure has also spiked up in what seems to be an uncontrollable fashion. She says that however, this speaks to more than just an internal controls matter. The CPO have seen a lower trend maturity levels within the SCM units and that includes processes, systems, people and governance. She says that supply chain management is taken as part of the strategy for each department and is treated as a function in the corner that is just supposed to procure for the department. She says that it should been seen as a part of the strategy and part of a strategic drive to address objectives of the department.

She agreed with Mr E Buthelezi that the CPO have seen deviations used for the purposes of fiscal dumping. This links directly to poor planning, where departments sit and do not implement their tender processes or when they realise that their Annual Performance Plan (APP) targets are not being reached, and as such they start deviating instead of concluding on their tender processes. One of the things that the office does is that they monitor procurement plans on a quarterly basis. They test the compliance and require reasons form the department should compliance not be met.

She says that with regards to government-to-government procurement, there has been a spike in implementing agents between government institutions. Some institutions are using implementing agents which are not part of their mandate, and that has posed a problem. She says that when departments lack capacity and are not able to meet the demands of other institutions themselves, they appoint service providers creating a big market chunk for these providers. The reliance on implementing agents increases the prices that other government institutions have to pay. The government department this is supposed to be providing this service ends up becoming like a middle man. This tends to create monopolies. She uses the example of the government printing works where they have a panel established [of commercial printers] where the government printer receives demands from the departments and pushes these demands onto the panel and the prices are exorbitant.

The Chairperson asks if they [the government printing works] do not print for themselves.

Ms Duiker says that there are some portions that they print themselves which are legislated and thus they cannot give to everybody else.

Ms Setan says that similarly with the CSIR and the Development Bank of SA (DBSA), you will find that they have implementing agents because they do have a mandate for this. But if they do not have the internal capacity to service the government departments themselves then they have to go out on their own tender process or use a panel which is just another middle man. With government-to-government procurement the CPO would like to see the government institutions using their own internal resources to fulfil the mandate.

Ms Duiker says that they do not use piggy backing because it also involves service providers at the end so it means that the institution that wants to piggy back would have to do so on an already existing contract in the other department. It is an uncompetitive way of procuring and promotes monopolies and it also increases the price because there is no longer competition. She says that they do audit the specifications on the sole/single supplier contracts but they audit specifications which have been bought to the attention of the National Treasury or the ones that they would have identified through the monitoring of the procurement plans, or the ones where they have received too many requests for cancellation. She says that their capacity is also not unlimited and says that the team that is dealing with this currently is sitting at a headcount of about 15 people, which have to deal with all spheres of government insofar as procurement is involved. This means that the amount of reviews which they can conduct is also limited. She says that they do conduct site visits of the various projects and also conduct workshops. These are targeted because of the limited capacity.

She says that there are issues of officials going to council without following proper processes and the fact they see irregular expenditure demonstrates that. She says the CPO tends to take a long time in processing deviations because they have to dig for information. Departments do not offer information and if you do to ask for it, they will not give it. They have also found that some of the things they do request do not exist and thus they conduct site visits, which are limited due to the limited capacity of the office. With respect to the issue around the tick box approach to audits; the problem there is the fact that the irregular expenditure framework defines irregular expenditure as non-compliance to any piece of legislation. What that means is that whether the non-compliance has material impact on the department or not, does not matter and it will be declared as irregular expenditure [by the Auditor-General].

With respect to oversight on the various projects, the office conducts site visits and engages with the institution, but because of the limited capacity of the CPO, they can only do so much of that oversight. She says that they currently do not have a profile for the departments who have made it a norm to deviate. They have the data but would need to analyse it and as such. They would like to answer this question in the next meeting.

With respect to the pit latrines, CPO are aware and have been assessing performance on these projects. She says that one toilet can cost about R1.2 million to install and this is purely because of the manner and the challenges that they have. The way the procurement system is currently designed is that it allows for middle men and the cost thus becomes bloated. The department will appoint an implementing agent which is a cost, then the implementing agent will appoint project managers, then there will be the contractors and the subcontractors. All these costs add up thus bringing one toilet to an estimate of R1.2 million.

The Chairperson says that when the CPO come back, he would like to know what they are doing with respect to this issue since they have identified the problem.

Ms Komane says that they need to request that the office of the CPO engage with the various departments. They need to curb this issue of implementing agents.

Ms Ntlangwini raises concerns with their ability to fulfil their mandate with the capacity that they currently have.

The Chairperson says that they need to look at the Public Procurement Bill so that some of these issues could potentially be tackled using the Bill.

Ms Setan says we must remember that public procurement has some social obligations that it has to address. They did an exercise in Gauteng where they analysed the procurement process and there are about 800 things that need to be checked before the process can go through. She says that most of what government buys has to go through the tender process. There are areas and industries where they can do closed bids or limited bids but government wants to go through the open tender process [which is prescribed and has many advantages]. This speaks to the maturity levels and that people do not understand the principles of strategic sourcing where you weigh up the risks and values versus the market complexity.

Ms Duiker responds to the issue of payments and says that problem rests mostly with corruption. She says that in construction projects the professional services are independent from the contractors which are the construction companies. The professional services are the ones that are supposed to certify the work that has been done by the contractor. The problem is that the fees of the professional engineers are a percentage of the total value of the project and so the professional engineers and the contractors may collude. If the contractors balloon the price of the project, automatically the fees of the professional engineer go up. Also, in the construction industry, it is seen as a norm to have variation orders. There is some work being done with respect to infrastructure projects where they are working on frameworks of how they can better the implementation of infrastructure in government in general. Government needs to look into owning their own intellectual property related to contracts. They need to own the design of the project along with the feasibility studies so that when the contractor comes into play or if they need to change the contractor, they do not pay to change the design as they own the design. What happens with professional engineers is that if the government has a problem with the one that they have appointed, and appoint another one, the second one will come and change the whole design and use their own and this is a problem.

She says that what they plan to do in the new financial year in response to tackling the issues they have spoken about is to conduct an adequate government wide risk assessment on procurement so that they can identify the cases where there is both a high probability of failure as well as a high impact. With the limited capacity that they have, they can then focus that on the things that matter the most. She says that they have started to build a good relationship with the office of the Auditor-General (AG). Their agreement with the AG is that they give them a deviations report and they audit the deviations, so when the CPO team go to the various institutions they already have a list of deviations which have been supported and not supported. The list allows the CPO to check that all those deviations which were not supported have not gone ahead, that those which were supported have gone ahead in the manner proposed and that those with conditional support have all the conditions met before going through with the deviation.

Ms Setan adds that Ms Duiker’s team have conducted workshops specifically to address something that they perhaps found in a bid reviewing process where one department has difficulty in understanding certain elements. She says that it is the responsibility of the accounting officer to ensure that their people are trained. She also highlights the progress on an interdepartmental committee they are in a process of establishing. This will consist of public finance, the AG office, the Asset and Liability Management Division (ALM) within the National Treasury and Intergovernmental Relations (IGR) so that everyone can know what department they are responsible for and they can see the impact of deviations on public finance and budget. The CPO are waiting on a submission to go to the Minister to give to the delegation of this committee. They are also looking at delegating the deviations to the provinces and this must be signed off by the Minister. They are also looking into a maturity assessment. They are busy with a framework for deviations and they have the first draft ready. They have also started a process to engage with AG on a monthly basis.

She says that with respect to the drones for SAPS, sometimes the police service will have projects which they do not want the public to know about. They need to have companies that are vetted and they do not have to supply information to the public. Ms Duiker adds the confidentiality aspect is the reason why they did to want an open tender process. This does limit the number of suppliers who can bid but they cannot expose that information to a large number of service providers. So it does not mean confidential in the sense that they do not know about it.

Ms Komane would like clarification on why the top 15 hotels are used for South African Airways (SAA) cabin crew members as they should be supporting small businesses as well and not just big conglomerates.

Ms Duiker says that the reason why they use these 15 hotels is because these are the top 15 internationally and are close to the various airports. Further, they cannot go on an open bidding process when they are in countries like France or Brazil. She says SAA have identified the top 15 hotels which they can find in the majority of their destinations.

The meeting was adjourned.