Deviation and expansion for national departments and entities for 4th quarter 2018/19 & 1st quarter 2019/2020: National Treasury briefing

Meeting report

The Chairperson said the delegation from National Treasury’s Office of the Chief Procurement Officer (OCPO) would take the Committee through the expansions and deviations of contracts in the fourth quarter of 2018/19 the first quarter of 2019/20. Scopa had been concerned that expansion and deviations were becoming normalised and abused the procurement protocols. This briefing was important, as next week Scopa would go into its study groups in preparation for the hearings of departments found lacking based on the findings, amongst other aspects, in the reports of the Auditor General (AG).

Mr Willie Mathebula, Acting Chief Procurement Officer: OCPO, apologised for the absence of Mr Dondo Mogajane, Director-General (DG) of National Treasury (NT). The Department was very preoccupied with the Medium-Term Budget Policy Statement (MTBPS), and Mr Mogajane had therefore asked Mr Mathebula to represent him today.

The Chairperson wanted it to be noted for the record that it was not acceptable for executive officers not to avail themselves for Scopa meetings. These apologies must not become a norm.

He asked how long Mr Mathebula had been acting Chief Procurement Officer (CPO).

Mr Mathebula replied that he had been acting CPO for three years.

Mr M Dirks (ANC) wanted to know if all three representatives of the OCPO had been formally vetted.

Mr Mathebula said that all representatives present had submitted their vetting forms in 2018, as requested by Scopa. They were awaiting the results from the relevant government agencies.

Mr B Hadebe (ANC) sought clarification on the accounting officer (AO) who approves deviations and expansions. Was OCPO part of the office that approves deviations, or what was their relationship to that authority? He wanted to make sure that they were asking questions to the correct person.

Mr Mathebula confirmed that OCPO evaluates the reasons for deviations and recommends whether to support or not support contract deviation requests. The final decision was taken by the relevant accounting officer or accounting authority.

Mr Hadebe said that the Committee’s pressing questions were then being addressed to the wrong entity, as the OCPO did not have the authority to reject or approve deviation and expansion requests. He asked the Chairperson if the accounting authorities had been invited to the meeting.

The Chairperson confirmed that the invitation had been sent to the Minister of Finance and the DG of National Treasury.

The Chairperson said he understood that the MTBPS had created scheduling conflicts, but he expected the DG of National Treasury to at least issue a formal apology for not attending this meeting. Mr Mathebula must convey the Committee’s strongest objection to this practice of executive non-attendance.

Mr S Somyo (ANC) suggested that the Committee break for five minutes to obtain written directive from the DG of NT that Mr Mathebula had been delegated to represent him at this meeting.

Mr R Lees (DA) agreed that the DG must be made aware that the Committee was ‘disgruntled’ and required a written apology for his absence from the meeting. However, since this was a briefing and not a hearing, he suggested the Committee proceed with the presentation.

Scopa requested that the OCPO delegation obtain a written apology from the DG of National Treasury, to be submitted to the Committee, excusing himself from the meeting and delegating authority to the delegation present today. This letter was to be received before the end of the meeting. The Chairperson emphasised the importance of a paper trail in meeting correspondence, as it confirmed compliance

The request was actioned by the Parliamentary Liaison Officer for National Treasury, and the apology from the DG was received and accepted in due time.

Consolidated report on deviations and expansions: National Treasury briefing

Mr Mathebula started by familiarising Scopa with the supply chain management (SCM) instruction notes of 2016/17, and said OCPO was concerned and try to prevent practices that regularised and normalised deviations and expansions

Mr Lees interjected, and asked if National Treasury did not support certain applications, the accounting officer in charge could ostensibly carry on with the application? He specifically wanted to clarify that when the presentation mentions OCPO “don’t support” an application, that meant that the application was in fact not implemented.

Mr Mathebula confirmed that when OCPO did not support an application, they did not expect the accounting officer to go against their recommendation. If they did not agree with the recommendation, they would rather come back and appeal the recommendation than go against it. If the accounting officer went ahead, they did so at their own peril.

The Chairperson asks the acting CPO to elaborate on the meanings of the yellow highlighted sections of the excel spreadsheet. Mathebula explains that the yellow cells indicated the total number of requests issued to OCPO.

Mr Mathebula continued with the presentation, guiding Scopa through the graphical summaries of deviations and expansions for quarter four of 2019/20 and quarter one (Q1) of 2019/20.

He concludes by discussing the stated reasons why entities continued to request deviations and expansions. In OCPO’s experience, the main underlying reasons for deviations and expansions were as a result of poor planning and contract management.

 

Discussion

Ms B van Minnen (DA) said there were alarming figures in Eskom’s deviations, particularly when it came to previous extensions. How did this relate to contract extensions in the fourth quarter?

Mr Lees asked whether, in the cases where OCPO rejected ‘ex facto’ applications, they gave feedback to the applicants. This could help educate the entities and contribute to fewer deviations and more responsible contract management. Secondly, was there legislation under review that seeks to give National Treasury authority to approve or reject contract extensions/deviations instead of just having advisory capabilities?

Mr Hadebe asked how many, if any, deviations OCPO had approved which did not meet their criteria -- for example, where they felt the reasons given were due to poor planning or contract management, but because of the critical nature of a project, they felt obliged to approve it. What legal status did OCPO have? Were there decisions legally enforceable or not?

What were the rules in a scenario where there were many service providers for a tender, but only one had the requisite capacity to fulfil the job -- was this considered grounds for a sole source contract? He feared that this opened the possibility for anti-competitive behaviour, as specifications could be mandated for contracts which would exclude certain suppliers. How did they decide whether these sole source suppliers were competent, and what processes/protocols were involved in determining whether a supplier was indeed a sole source?

Mr Hadebe observed that OCPO’s instruction notes make provision for excluding certain entities. What was the reason for this, and were these exclusions applicable to local government too?

Were there any instances where National Treasury did not support deviation/expansion applications, but AOs override these recommendations and proceed with their own decision, or were all NT recommendations adhered to by the AOs?

He asked what criteria or processes were considered to determine exceptional cases of deviations/expansions, because if there was no process, the understanding of what was exceptional would become ambiguous.

A Member also wanted to know what processes or frameworks National Treasury uses to identity sole source suppliers. She was further concerned that AOs used deviations for corruption. What processes were in place to ensure these deviation cases were not used for corruption?

Ms N Mente (EFF) asked whether content advisors could in future filter the overwhelming amount of information provided in these presentations, as it was currently difficult to make sense of the amount of information provide at such short notice.

The Chairperson agreed, and explained that for today’s meeting, the documentation was made available very late. This was a fundamental issue that must be improved on going forward.

Ms Mente asked whether NT or OCPO had a mechanism to detect the seriousness of an emergency when a deviation application was made, and whether this would influence their decision to grant or disallow a request. She cited the water issue in Lepelle, Limpopo, adding that in these cases, these deviation contracts must have time limits. The emergency contract in Limpopo had now been in effect for three years, yet it was no longer an emergency. How had National Treasury allowed this?

She also asked how OCPO controlled deviations/expansions in the case of contract mismanagement -- for example, the South African Police Service (SAPS) expansion in the first quarter, which was granted by National Treasury. Was any consideration given to the idea where, instead of granting extra deviations, NT should rather extend contract deadlines? This would ensure that deviations were not granted, thereby compelling entities to follow the correct procurement process.

Ms Mente asked if National Treasury considered the AG’s report on entities like Eskom, where contract mismanagement was reported. If so, why did they then continue to grant deviations to known culprits of contract mismanagement? Did National Treasury have any measures in place to incentivise public entities to adhere to good contract management?

Regarding the conditional support mentioned in the OCPO report, she asked that the Committee be supplied with a list of the conditions stipulated in these agreements. In the case that this conditional approval was recommended, was there data on which of these entities actually met the conditions?

Mr Somyo said that in terms of public service regulations, acting positions should not last more than 12 months, yet Mr Mathebula had been acting CPO for three years. This was not acceptable.

He asked whether National Treasury followed up to monitor how effective contract deviations were, and if they guaranteed meaningful results? This type of oversight was necessary so as not to regularise deviation grants. Did OCPO publish a list of applications indicating which were supported/not supported, as well as a summary and/or comments from the AG? This could help minimise regularising deviations.

Mr Somyo also raised a concern that many of the deviations shown today were granted regularly, as in the case of Eskom, for whom the deviations ran into the billions. He said Eskom’s behaviour did not seem to indicate that they were actively trying to stop applying for deviations, and this sent out the wrong message to other entities regarding the regularising of deviation grants.

He also asked whether OCPO or National Treasury issued responses or warnings to government entities who apply for deviations which could help ensure deviations did not become standard practice going forward.

Ms B Zibula (ANC) said that it was no use Parliament passing laws when entities did not follow them and instead regularised the deviations. She also asks how the problem identified by Mr Mathebula -- the discernible resistance to change in behaviour regarding deviations -- was going to be dealt with as a Department. When deviated projects were not completed, why did National Treasury continue to provide deviations and extensions to these projects?

Mr Dirks asked how OCPO could support deviation/extension applications which did not have definite starting and expiry dates. Emergency procurement could become a corruption risk if not regulated effectively. OCPO’s presentation indicated that conditional support was given to Eskom, yet there was no starting or ending date to the deviated contract, and this was akin to giving these entities a ‘blank cheque’. Eskom should have the capacity to manage their contracts and budget. If there was proper planning, hopefully there would be fewer emergency procurement requests.

He commented that he was of the opinion that Eskom was situated wrongly under the Department of Public Enterprises. He maintained that it should fall under the Department of Mineral Resources and Energy, and this would solve its pressing problems.

The Chairperson said the presentation indicated that deviation requests in the first quarter amounted to R2 billion, yet in the fourth quarter they amounted to R7 billion. This seemed like substantial fiscal dumping. Had there been any efforts to determine why this difference was so large? What was driving this trend? Furthermore, in instances where OCPO did not support a request, was there a tracking mechanism in place that monitors the AO’s actions with regard to the application?

When there was conditional support, was there oversight on the compliance with these conditions?

The Chairperson said it was also important to understand why these trends in deviations/expansions were happening. Was it because suppliers were successful through bidding low, thus ensuring the entity got its preferred service provider, knowing full well that it would need to apply for deviations later? If so, this type of behaviour was undermining the integrity of the tendering process.

OCPO’s Response

Mr Mathebula addressed the question regarding the previous expansions afforded to Eskom in the fourth quarter. He said the institution itself had the authority to expand within the contract deviation threshold mentioned on slide four of the presentation. Only when it exceeded that threshold did they have to report to National Treasury. When they exceeded the threshold of R15 million, the request was brought to National Treasury. In Eskom’s expansion/deviations, NT was deeply involved, and gave support where it was warranted. They did not extend contracts where previous conditions were not met.

The Chairperson asked whether Mathebula was aware of processes in place that dealt with deviations/expansions to ‘evergreen’ (perpetual) contracts. How many times was a contractor allowed to stay employed?

Mr Somyo also raised a concern over the point made that deviations/expansions under R15 million did not need approval or regulation from National Treasury. That was problematic as it gave these entities large leeway, and was still a considerable amount of money.

Mr Dirks asked Mathebula if he thought evergreen contracts were legal under the SA constitution.

Ms Van Minnen said that in line 29 of the Q4 spreadsheet, the value of the original contract was R843 million. The value of the contract extension was not stated, yet the value of previous extensions was R15.5 billion. She asked for clarification, as these figures did not make sense.

Mr Mathebula clarified that many of the expansions granted were with respect to time extensions, not money. Entities only applied to be given more time in finalising contracts, but for reporting purposes they captured them as expansions.

He confirmed that deviations/expansions below R15 million were at the discretion of accounting officers. However, they must report to National Treasury if it was more than R15 million.

Responding to Mr Lees about whether they follow up on the contracts where they make recommendations, he said that the AG was also kept informed of these results.

He confirmed that the Instruction notes were indeed legal and actionable.

National Treasury had a framework in place to condone irregular expenditure. The AG must record irregular expenditure in a report. Only after that could the relevant entity come to NT to request condonation for irregular spending. An investigation would be done on what had led to the request for deviation/expansion, who was responsible and what sort of consequence management was in place. Only upon receipt on all these documents, and proof that someone was found responsible for mismanagement of the contract, would Treasury consider the request.

Mr Mathebula said that AOs were allowed to conclude transactions without consulting NT in emergencies, which they then report to Treasury afterwards. When the AG did the audit on the emergency expenditure, it would also evaluate the legitimacy of the claim of sole source contractorship.

Local government was managed through the Municipal Finance Management Act (MFMA), which made it clear on the processes to be followed.

OCPO notes that some deviations have nefarious reasons. Where they suspect this, OCPO does not approve, and instructs the AO to proceed with a competitive tender process.

He agreed with Ms Mente that contracts for emergency procurement was an important issue, and must be temporary. It should not last longer than the emergency exists. They had developed a framework to help institutions and entities improve their contract management.

Mr Mathebula said that where there were conditions attached to OCPO’s support, they did follow up with the entities. There were institutions/entities who were repeat applicants. OCPO did contact these entities to warn them if these instances became regular.

In response to Mr Dirks’s question, his view on evergreen contracts was that he did not support them – they act as a barrier to entry. He admitted there were cases where there might be only one supplier for certain commodities, and this required a continuous contract. Generally, however, one could not allow these perennial contracts, where only one player was supported to the detriment of other suppliers.

Regarding the Chairperson’s concern of ‘fiscal dumping’, he said that the first quarter always took off slowly, as it was the start of the budget year. This should be factored in. Where there were serious issues, they always informed the Auditor General.

Suppliers always pitched low to gain a tender, and then needed variations later in the contract. That was an issue that needed to be confronted.

Ms Rose Mahlaule, Director: Supply Chain Management (SCM) and Government Monitoring and Compliance (GMC), NT, said that the instructions ensured deviations did not lead to corruption. The instruction notes as detailed in the presentation were key in dealing with issues of corruption with regards to deviations and expansions. When they received irregular expenditure requests, they engaged with the requesting entities. When OCPO did not agree with their reasons, or there was evidence of malpractice, they sent a report to the AG.

OCPO verifies that the granted deviations are effectively used by sending teams to investigate the progress. Conditional support was only granted based on the validity of the reasons provided.

Discussion

Mr Dirks said that evergreen contracts were not democratically just. Even when the OCPO grants time extensions, as opposed to financial deviations, time did have financial implications.

Mr Somyo said there would be a financial loss when time extensions were granted, one way or another. He suggested the first and fourth quarters were busy in different ways. In the first quarter, there was no visible service from what was spent, while quarter four was the result of the ‘March spike,’ which was where the decisions that had been discussed throughout the year were actioned at the last moment. This had huge financial implications and caused rushed approvals. The carryovers needed to be investigated.

He said Scopa did not want to hamper service delivery, but contracts had to be concluded within the correct regularity frameworks. He approved of the partnership OCPO had with the Special Investigating Unit (SIU), which worked together on various existing contracts.

He had an issue with how OCPO intervenes in problems. It was not sufficient for them only to recommend support or no support, and leave the authority with AOs. What could be done to eliminate this type of scenario?

Ms Mente asked what the law regarding ‘evergreen’ contracts was. For example, how would one begin to roll back the ‘evergreen’ nature of these contracts? She gave examples, like Eskom and South African Airways (SAA), which were implicated in evergreen contracts. Did OCPO have any remedies for this? If not, was there legislation that could be drafted to curb this behaviour? She asserted that roughly 90% of evergreen contracts were not even essential.

She was also concerned with OCPO only issuing notes and recommendations on irregular activities, but not involved in any action. The office must be able to initiate criminal charges, or at least inform the Committee on irregularities that had to stop. What powers did the Department have to stop making concessions to guilty departments? She understood that service delivery must continue, but there should be rules that recurring offenders did not get granted exceptions. These incompetencies must not be tolerated.

Ms T Marawu (ATM) asked whether there were measures to monitor contracts so that entities did not abuse funds. These preventative measures were vital to assist and to provide warning signs on specific contracts. What happened to AOs that inherited fruitless expenditure? How did they go about managing these accounts?

Mr Hadebe asked whether it was the prerogative of the accounting officers of each entity to approve sole source verification. Was there no oversight by the OCPO to verify these claims?

He said the R15 million deviation/expansion threshold was problematic. It raised another manipulation issue, where suppliers would bid but then embark on a process of variation/expansion up to the limit of the R15 million threshold.

Mr Lees said that according to his understanding, the OCPO did not control, even if they did support, these deviations/expansions. That was the job of the AG, and it was Parliament’s job to provide oversight. As far as he knews, the OCPO had no way of conclusively determining if all their recommendations were followed. The AG should be the final authority for confirmation, and should ideally follow up on the recommendations made by the OCPO.

Regarding money spent within the threshold, the AOs in charge did not have a ‘free for all’ to allocate these funds. There were still checks and balances, but OCPO’s structure and mandate was not to produce those checks and balances, as this could duplicate some of the roles of the AG.

Mr Lees said that some evergreen contracts involved sole suppliers, and were thus not necessarily corrupt in nature. He asked whether OCPO could provide evidence on these necessary ‘evergreen’ contracts.

OCPO’s Response

Mr Mathebula confirmed that evergreen/indefinite term contracts did exist for sole source providers, and they were indeed necessary to be utilised.

The OCPO did grant a number of time extended contracts. However, in these cases, money was usually still available in the contract, showing that there was not spending mismanagement, but just a lack of time.

Insofar as unnecessarily long contracts were concerned, AOs had powers to take these contractors to court so that entities were not ‘held to ransom’ by these contracts and could nullify them if they were not necessary. There was also a provision for a tender, before it became a contract, to be terminated legally if it was not necessary.

Mr Mathebula said they were reviewing the current regulatory framework, which makes provision for giving more power to the OCPO to act and investigate where it suspects issues. At present they did have some funds available to authorise forensic investigations in critical cases.

Regarding cooperative governance, there was a branch of Treasury that looks at intergovernmental cooperation, which cuts across provincial and municipal finance. These finances were supervised very closely, and Treasury could monitor which municipalities were under financial stress. It would then report these findings to relevant authorities, such as the budget council, so that they knew what was going on. These reports were available and could be circulated to Scopa if required.

Ms Mahlaule clarified the issue surrounding deviation/expansion thresholds. She said that R20 million was the maximum amount for construction related goods and services, and R15 million for other goods and services. So even if a contract was worth R5 billion, the threshold did not increase -- it remained R20 million and R15 million respectively.

She added that requests for contract time extensions were granted under the condition that the concession must not have financial implications.

Ms Basani Duiker, Chief Director: SCM Governance, Monitoring and Compliance, NT, said that the issue of resistance to change and finding easy ways out of best procurement practices were often due to the structuring of the contracts being entered in to. Institutions were often ‘locked’ into contracts, where changing the contract implied massive changes in the operation. In instance like this, OCPO engaged with these entities to help improve the contracts they enter in to.

The OCPO had a close relationship with the AG, and hand over all their reports and information to their office. It was confident that the information they hand over to the AG was appropriately engaged with.

Ms Duiker said the role of OCPO was mostly ‘preventative’, in that it tried to curb issues of non-compliance which had financial implications and cost the state money. OCPO also engaged in risk-based compliance monitoring as part of procurement plan analysis. This was where they identified high risk projects or entities that required extra monitoring and investigation.

The Chairperson thanked the OCPO delegation for their report, and commented that there were a lot of loopholes in the system which Scopa would investigate. The picture was getting clearer as to the specific issues they must investigate. Its research team would examine today’s presentation and delve further into the merits and demerits of the report.

He asked Mr Mathebula to remind his colleagues that Scopa was still awaiting National Treasury’s report on unauthorised departmental expenditure which had bearing on the meeting scheduled for 19 November.

The meeting was adjourned.