Public Sector Supply Chain Management Review 2015: National Treasury briefing

Meeting report

Mr Schalk Human: Chief Director, SCM, National Treasury, highlighted the objectives of the supply chain management (SCM) review as providing a frank and candid assessment of SCM aspects, providing insights on the SCM reform agenda, and providing a view of the role and functions of the Office of the Chief Procurement Officer (OCPO).

In an attempt to provide a candid assessment of SCM aspects, consideration would be given to the role of SCM in the public service, organisational structures and systems, the roles of technical and political office bearers in SCM, the capacity of SCM practitioners (skills were still lacking), legislation and regulations in SCM (which were old fashioned), supplier management relations (which had not been well embraced), and striking a balance between social objectives and transformation, and price and quality of goods and services.

Public procurement objectives were identified as service delivery in different facets of the government, socio-economic objectives, and getting value for money and return on investment (which he claimed was difficult to quantify). Getting the right balance between the objectives was important. Service delivery should be of high quality and quantity, be efficient, cost effective, timely, and at the right price. Over R500 billion was allocated yearly for achieving socio-economic objectives, focusing on racial economic imbalances, youth, women, the disabled and small business enterprises, while job creation would be prioritised.

The current SCM system was fragmented which posed a difficulty for procurement officers in deciding on which rule to comply with. There was operational inefficiency in government, over-emphasis on secondary objectives, a lack of coherence between departments, and limited or no accountability politically and administratively. Limited transparency, which was mainly motivated by political interference, remained a concern. The number of deviations from contracts and the extension of contracts was alarming. Detailed tender information disappeared overnight, and a gross manipulation of scores had been identified as issues to be dealt with.

While identifying the challenges of SCM, he said that audit outcomes at all levels consistently found SCM operations to be irregular as a result of non-compliance, and it had become a major concern for the Chief Procurement Officer (CPO). The root causes of poor SCM performance were a lack of clear and standard directives for the whole government, and insufficient human resource capacity and management to complete activities in the expected time frames and per acceptable standards. Other challenges were a lack of competency to ensure quality outputs, a negative culture of will, and a slow procurement process in responding to issues. According to a survey by the Public Service Commission, roughly 200 000 public servants owned companies which had benefited from governmental services in the form of tenders at some point.

Mr Human said that procurement as a strategic function sought to identify where the procurement function was in the corporate hierarchy, alignment between procurement strategy and departmental strategy, alignment between procurement capability and departmental strategy, management of procurement risks and a clear identification of procurement objectives. The procurement system should be based on capabilities such as accurate demand planning, procurement planning, correct items and specifications management, supplier management, management of bids through the required committees, inspection and quality management, utilization of products and services management, effective supply schedules, and audit and enforcement. Legal, contracting, and dispute management should also be addressed, as billions of rands were spent yearly on cancelling contracts, and nine out of ten cases were lost to suppliers.

The overview on national government spend by commodity class revealed that commercial and office building construction services, and the lease and rental of property or building, accounted for the majority of the resources. As regards expenditure, he highlighted medical practice as the highest under healthcare services, while inventory medicine accounting for the largest share under drugs and pharmaceuticals.   The four top government suppliers were the Independent Development Trust, National Health Laboratories, external auditors servicing the Auditor General, and Impilo Consortium (building construction). From the goods and services perspective, Correctional Services was the highest spender, closely followed by Justice and Constitutional Development and Water Affairs. 12 departments accounted for 80% of the national government’s spending.

Areas requiring immediate review or intervention were the centralisation of travel and accommodation, telecommunications, computer services and hardware, consultancy and professional services, education, and health. Urgent intervention was needed in construction or infrastructure standards, human settlements -- R2 billion had been spent on fixing houses less than two years old -- public entities, and infrastructure delivery.

Mr Human unfolded the Central Supplier Database (CSD) high level conceptual solution. He explained that the CSD was a logic model that electronically interfaced with entities such as the South African Revenue Service (SARS), the Companies and Intellectual Properties Commission (CIPC), the Department of Home Affairs, and many more. The CSD afforded suppliers the opportunity to register only once, rather that multiple registrations, enabling a significant reduction in the administrative burden of suppliers.

He also described two other models -- the e-commerce site and e-tendering site. The e-commerce site contained a list of transversal contracts of government which enabled suppliers to grasp prospective business opportunities. The e-tendering site had gone live on 1 April 2015, and currently offered about R2 billion of procurement opportunities weekly.

Mr Human said that to enable a conducive SCM environment, procurement must be recognized as a strategic function. Greater investment was needed in building capacity, political economy must be dealt with, the use of technology had to be optimized, and consequences in the form of enforcement were extremely essential in oversight and accountability. Specific action should be effected, such as determining the turnaround time for tenders and maximising contract management, having a skilled professional workshop for accounting officers, and a quarterly briefing of executive authorities by accounting officers as it related to departments, municipalities, or entities.

The Committee should support the OCPO’s initiative to accelerate SCM reform by modernising the function in the public service through:

• Finalising the legal framework governing the OCPO and SCM function in government;
• Simplifying rules in all spheres of government;
• Modernising SCM technology and up-scaling its intelligent use (CSD, E-tendering, E-commerce);
• Developing the SCM capacity of government.

Discussion

The Chairperson commended Mr Human for his apt presentation. He informed Members that the lengthy presentation was a function of the detailed breakdown of how the budget was being used in service delivery.

Ms T Chiloane (ANC) sought clarity on the budgeting for contracts. She inquired if the budgets were from different departments, or if they were particular set of budgets set aside by the Ministry of Finance. She then asked if the OCOP was in operation and housed in the national government, and whether it was linked to the provincial departments.

Ms N Khunou (ANC) inquired about the length of establishment of the OCOP’s office and also why the challenges had been highlighted only in 2015, rather than earlier. She asked about communication and liaison arrangements with other departments and provinces. She inquired how coordination between organs would be strengthened and how and when the gap between the first and second economies in the country would be bridged. The capacities of the poor should be developed, rather than just presenting Black Economic Empowerment (BEE) scores. She expressed her doubts whether transformation would ever be accomplished.

Mr C Ross (DA) expressed his delight about the e-tendering and the integrated management system of the SCM. He inquired about the mandate of the Department in terms of procurement measures. He asked if there were set standards of directives in national and provincial departments, and the progress that had been made in terms of dealing with irregular and unauthorized expenditure. He said that the 10% correlation between the demand plan and actual implementation was totally unacceptable. He lastly asked about the documents required for the Committee to review the supply procurement bills.

Mr T Brauteseth (DA) asked why building in-house capacity was not effective in South Africa. He asked if penalties were applicable to service providers to the government and if there had been any case studies where penalties had been applied. He sought clarity on measures taken to ensure that the search for products on the e-commerce site did not display third parties offering the same products. He commented that internal auditing required strengthening, and asked if the review of SCM bills was part of policy or just the Department’s opinion.

Mr E Kekana (ANC) asked if the Department or the OCPO would be responsible for specifications in the preliminary work. He sought clarity on how the OCPO would take the responsibility for checks and balances in the Department. He inquired if efficiency and elimination of corruption was guaranteed after the centralisation of the procurement office.

The Chairperson noted that the questions asked by Members were interrelated and dealt mainly with issues of inefficiency, transformation, and corruption. He said that even with the current resources, certain levels of efficiency could be achieved.

Mr Human, in response to questions around the establishment of the office, said that the Minister of Finance had announced the formation of OCPO in 2012, but it had commenced operations only on 1 April 2013 with its 50 current employees, and with the hope of adding another 20 soon. The mandate of the OCPO was to set policies, while government monitored compliance. The planning and execution of budget was not a new phenomenon.

He said the Department of Trade and Industry (DTI) had revealed that 20% of Black Economic Empowerment (BEE) certificates were fraudulent, and SARS had also indicated that 15% of tax clearance certificates were fraudulent. Transformation was not all about figures and certificates, but rather about making reasonable economic progress. The database had revealed that small businesses did not survive in South Africa, as it took a lot of resources to prepare documents for a bid for R500 000 to R1 million.

He explained that the Central Supplier Database eradicated multiple registrations and duplications, and relieved the administrative burden of suppliers. Addressing questions on mandates and unauthorized expenditures, he said irregular expenditures came through in the same patterns yearly and the corrective action was to prevent them before they happened. E-tendering ensured visibility and transparency.

He said that the Procurement Bill was in version 11, and still a draft. Consultations would take place with the appropriate provinces before the end of the financial year. E-tendering afforded bids open to the public and that there were over 30 000 tenders worth over R500 000 which were decentralized, although this was currently only in Gauteng and Cape Town.

Mr Human also addressed penalty-based questions. Penalties and consequences were subject to the terms of contracts, but they were not enforced. Although there were legal provisions, the consequences were not enough, especially for officials. A survey had revealed that over 200 000 civil servants owned companies. A price referral system needed to be developed and beefed up with at least 10 million items in order to be effective. In terms of e-commerce, he said there were currently four procurement systems in place, giving transversal contracts as a typical example.

He claimed inefficiency costs the country more resources than corruption. The e-procurement system would possess electronic interfaces with the government whereby progress could be tracked. Corruption needed to be dealt with without any hesitation.

In his concluding remarks, he said that the OCPO had been in operation for two years, and practical things had materialized. He suggested that the OCPO should be allowed to report more often to the Committee on issues that were seen to be vital to make progress.

Ms Chiloane said that there was a budget of R847 billion over the next three years pertaining infrastructure projects, and asked about the location of the projects.

Ms Khunou mentioned that monopolies should be dealt with and that the road construction industry should be checked, as it accounted for a bulk allocation of resources and value for money was not being achieved.

Mr Ross requested a draft of the SCM bills, and enquired about the implementation date of the CSD and e-commerce.

Mr Kekana asked again about the mandate of the OCPO.

Mr Human said that the sanitation function, which used to be part of the Department of Housing, was now reflected under the Department of Water Affairs. He suggested that a clear view of expenditures could be obtained from Estimate of National Expenditure (ENE). Using the Department of Health in Limpopo as a case study, he affirmed that the Department had a R13 billion budget and that R9.5 billion was expended on the salary bill, while R3.5 billion was spent on goods and services. The presentation had reflected only goods and services budgets, which explained why the figures were not tallying.

He said R300 million worth of maize had been imported from Lesotho by local farmers and co-ops through the Lesotho food programme. There were over 161 registered co-ops in Limpopo, but only five were operational

Road construction and rural industrial development would be properly looked into.

Copies of the SCM bills could be made available as requested, but it was still a draft.

The CSD and e-commerce would both be launched on 1 September 2015. The ecommerce would start with three major products -- textiles, petroleum products, and medical equipment.

He referred Mr Kekana to pages 6 and 7 of the slide presentation regarding the mandates of the OCPO.

The Chairperson said that daunting tasks in front of the Committee had been cleared. He added that there seemed to be no physical proof of the R500 billion being spent on socio-economic services. It was the sole responsibility of the Committee to act on information received from the Department of National Treasury. An audited annual report should be rather presented on the specifics of the state of SCM, and not just at a generic level.

The meeting was adjourned.