REPORT OF THE PORTFOLIO COMMITTEE ON PUBLIC SERVICE AND ADMINISTRATION ON THE PSC Report: Evaluation of Supply Chain Management Practices within the R200 000 Threshold, DATED 14 APRIL 2010

1 Introduction

The Public Service Commission (PSC) is constitutionally established as an independent institution that has the following powers and functions (Section 196(4) of the Constitution of the republic of South Africa, 1996):

a) to promote the values and principles set out in Section 195 of the Constitution, throughout the Public Service;

b) to investigate, monitor and evaluate the organisation and administration, and the personnel practices, of the Public Service;

c) to propose measures to ensure effective and efficient performance within the Public Service;

d) to give directions aimed at ensuring that personnel procedures relating to recruitment, transfers, promotions and dismissals comply with the values and principles set out in Section 195 of the Constitution;

e) to report in respect of its activities and performance of its functions, including any finding it may make and directions and advices it may give, and to provide an evaluation of the extent to which the values, and principles set out in section 195 are complied with;

f) either of its own accord or on receipt of any complaint –

(i) to investigate and evaluate the application of personnel and public administration practices, and to report to the relevant executive authority and legislature;

(ii) to investigate grievances of employees in the public service concerning official acts or omissions, and recommend appropriate remedies;

(iii) to monitor and investigate adherence to applicable procedures in the public service; and

(iv) to advise national and provincial organs of state regarding personnel practices in the public service, including those relating to the recruitment, appointment, transfer, discharge and other aspects of the careers of employees in the public service; and

g) to exercise or perform the additional powers or functions prescribed by an act of Parliament.

The PSC is accountable to the National Assembly (Section 196(5) of the Constitution, 1996). In this respect, the PSC compiled a report on the Evaluation of Supply Chain Management Practices within the R200 000 Threshold which was tabled in Parliament on the 26 January 2010, and referred to the Portfolio Committee on Public Service and Administration (the Committee). The Committee received a briefing from the Public Service Commission on the 10 March 2010.

In light of the President’s State-of-the-Nation Address for 2010 and its strong emphasis on eradicating corruption in the Public Service, the Committee would like to submit this report and recommendations to the National Assembly for consideration.

2 Overview of the Public Service Commission’s report on the Evaluation of Supply Chain Management Practices within the R200 000 Threshold

Government enacted the Public Finance Management Act, 1999 (PFMA) and the Preferential Procurement Policy Framework Act, 2000 (PPPFA) in support of reform objectives in public service procurement. The PFMA served as a base document for good governance in procurement, while the PPPFA was designed to ensure that previously disadvantaged sectors of South African society have access to compete for government work.

The PFMA and its subordinate regulations, codes and procedures have established a clear framework for Heads of Departments as accounting officers on how to manage their procurement processes. Despite the legislative and policy prescripts implemented by government to manage the risks of fraud and corruption in Supply Chain Management (SCM), incidents of financial mismanagement, which includes SCM processes, remain prevalent in the Public Service.

The R200 000 threshold is the maximum amount that could be processed by a department, without the need for a bid or tender process to be undertaken. i.e. only three quotes would be necessary, for a department to take an informed procurement decision.

According to the PSC, the objectives of the evaluation were:

· To establish whether government departments adhere to departmental procurement policies within the threshold of R200 000,

· To identify areas of weakness in the supply chain management cycle that make procurement processes susceptible to fraud and corruption,

· To provide recommendations with regard to the curbing of incidents of irregularities, fraud and corruption regarding procurement processes.

2.1 Scope and methodology of the evaluation

The evaluation covered the period from 1 April 2005 to 31 March 2007. It was undertaken in the national and provincial departments of Public Works and Housing. The decision to focus on the departments of Public Works and Housing was taken due to the nature of their operations, which involves a large degree of outsourcing to service providers. The evaluation focussed on the Supply Chain Management (SCM) practices of these departments under the R200 000 threshold.

The methodology used entailed communication with the targeted departments for information and data, random sampling of transactions valued under the R200 000 threshold, review of documentation supporting transactions identified as part of the sample and conducting interviews. The limitation experienced in the evaluation was the tardiness of departments to respond to the PSC’s requests for information and data. The PSC decided on a 2% random sample of transactions to evaluate, which amounted to 1679 transactions. Focus was given to supporting evidence for key components of the procurement process, which were in turn tested against the requirements prescribed in the SCM Policy of each department:

· Evidence of invitation for quotations;

· Evidence of appropriate quotations;

· Evidence of evaluation of quotations;

· Evidence of request for services/goods from service providers; and

· Evidence of payment.

Interviews were conducted with SCM managers and/or other officials in the Finance section in departments that formed part of the scope of the evaluation.

2.1.1 Limitations of the evaluation

Even after departments were asked for information, summonsing departments was undertaken by the PSC. Despite the constitutional responsibilities of the PSC and the legislative responsibility of government departments to assist the PSC in executing its responsibilities, some departments did not form part of the study due to late or non-submission of the requested information. The KwaZulu-Natal Department of Housing, the Western Cape Department of Public Works and the Eastern Cape Department of Housing did not supply the requested documentation. The National Department of Public Works only provided documents after the study was concluded, and thus could not be included in the evaluation.

2.2 Public Service Commission’s findings

For each step of the evaluation process that was undertaken the tables below succinctly summarise the findings of the evaluation:

Table 1: Evidence of invitation for quotations

Department	Evidence of invitation of quotations	Average rate of compliance
National	54%	71%
Eastern Cape	83%	71%
Free State	81%	71%
Gauteng	58%	71%
KwaZulu-Natal	65%	71%
Limpopo	72%	71%
Mpumalanga	97%	71%
North West	87%	71%
Northern Cape	64%	71%
Western Cape	47%	71%

It was found that the average rate of compliance to procurement rules relating to invitation of quotations was 71%. In 29% of all transactions evaluated there was no evidence that quotations were obtained before orders were placed with service providers. Western Cape scored the lowest, while Mpumulanga scored the highest in terms of providing evidence for invitations of quotations. National departments were only able to provide 54% of the required evidence for proof of invitations for quotations.

Table 2: Evidence of appropriate quotations

Department	Evidence of appropriate quotations	Average rate of compliance
National	40%	55%
Eastern Cape	79%	55%
Free State	65%	55%
Gauteng	19%	55%
KwaZulu-Natal	53%	55%
Limpopo	62%	55%
Mpumalanga	84%	55%
North West	69%	55%
Northern Cape	41%	55%
Western Cape	42%	55%

In respect to receipt of the required number of quotations or appropriate written authorisation for deviation from the required number of quotations, only 55% of all transactions sampled complied. It was noted as a concern that, at National level and in four provinces, compliance in this area was below the 55% average. Gauteng provided the least evidence, while Mpumulanga provided the most evidence for appropriate quotations. National departments could only provide 40% of the required evidence for appropriate quotations.

Table 3: Evidence of evaluation of quotations

Department	Evidence of evaluation of quotations	Average rate of compliance
National	38%	54%
Eastern Cape	72%	54%
Free State	65%	54%
Gauteng	19%	54%
KwaZulu-Natal	49%	54%
Limpopo	62%	54%
Mpumalanga	80%	54%
North West	72%	54%
Northern Cape	45%	54%
Western Cape	42%	54%

The average rate of compliance to procurement rules relating to the evaluation of quotations was 54%. This was unacceptably low and indicates that the application of the criteria for awarding of orders for goods/services are not well controlled and monitored, and therefore could be prone to abuse. Gauteng provided the least amount of evidence, while Mpumulanga provided the most evidence for the evaluation of quotations. National level was only able to provide 38% evidence for evaluation of quotations.

Table 4: Evidence of requests for good/services from service providers

Department	Evidence of requests for goods/services from service providers	Average rate of compliance
National	88%	69%
Eastern Cape	91%	69%
Free State	87%	69%
Gauteng	71%	69%
KwaZulu-Natal	24%	69%
Limpopo	60%	69%
Mpumalanga	50%	69%
North West	93%	69%
Northern Cape	56%	69%
Western Cape	72%	69%

Only 69% of all transactions evaluated complied with the requirement that requests for goods and services from service providers must be recorded. Failure to issue specific instructions and/or orders to service providers exposes the departments, to amongst other irregularities, risk of incorrect deliveries and inferior quality of goods and services. In the absence of a specific instruction and/or order to service providers, departments are limited in their ability to terminate appointments of service providers or to litigate in the event of a dispute. KwaZulu-Natal provided the least amount of evidence for requests of goods and services, while the Eastern Cape Province provided the most evidence for requests for goods and services from service providers. In this instance, Mpumulanga only supplied 50% evidence and Gauteng provided 71%, while National departments provided 88% evidence of requests for goods and services.

Table 5: Evidence of Payment

Department	Evidence of payment	Average rate of compliance
National	93%	94%
Eastern Cape	85%	94%
Free State	96%	94%
Gauteng	98%	94%
KwaZulu-Natal	98%	94%
Limpopo	99%	94%
Mpumalanga	92%	94%
North West	90%	94%
Northern Cape	94%	94%
Western Cape	92%	94%

A total of 94% of transactions evaluated complied with the requirements of the due payment process. This level of compliance indicated that diligence is over the payment process. In this stage of the procurement process, the Eastern Cape provided the least amount of evidence, while Limpopo supplied 99% of the requested evidence showing proof of payment. National deaprtments provided 93% evidence of proof of payment.

The weakness in compliance to the prescribed SCM process identified in the report indicated that the application of SCM processes requires extensive improvement. These weaknesses make SCM process susceptible to the following irregularities, amongst others:

· Verbal requests for quotations so as to favour a service provider by providing incorrect information to competing service providers;

· Sending out invitations to quote at the last minute to competing service providers in order to favour a preferred service provider

· Inconsistent information being sent out irregularly in requests for quotations;

· Irregularly requesting less than the prescribed number of quotations to bypass the due procurement process;

· Applying inconsistent rationale when evaluating quotations for the same goods/services.

· Delivery of goods and services which do not correspond to the original quotation received from the service provider;

· Cover quoting, whereby an official of a department colludes with an external service provider to submit multiple quotations under differing entity names;

· Kickback schemes, where officials benefit financially from the awarding of a tender to a specific service provider;

· Irregularly directing orders to a business entity in which a government official has a vested interest;

· Deliberate manipulation of the evaluation criteria to reach a decision favouring an irregularly preferred service provider;

· False invoicing

· Overpayment of service providers; and

· Unauthorised expenditure in violation of the PFMA.

The PSC found that there were major shortcomings of the evaluation of sampled departments’ SCM components relating to the invitation of quotations, the evaluation of the quotations and the processes of issuing orders to service providers for goods and services. In general, the PSC found that departmental policies complied with legislation and regulations. The shortcomings in procurement, unearthed in the evaluation related specifically to technical implementation of the policies, which require diligent application of specific anti-fraud initiatives, such as proper documenting of transactions, record-keeping and written deviation reports. Record-keeping of this nature could also assist in alleviating persistent qualified audit reports of government departments.

3 Findings of the Committee

The KwaZulu-Natal Department of Housing, the Western Cape Department of Public Works and the Eastern Cape Department of Housing did not supply the requested documentation. The failure to comply with the request for information and documentation is a contravention of the Section 9 of the Public Service Commission Act, 1997. It was agreed that these departments should be held accountable for their contravention of legislation.

The National Department of Public Works only provided documents after the study was concluded, and thus could not be included in the evaluation. It was established that this information should have been available when requested, if the SCM processes were taking place as envisioned. It was worrisome that the PSC’s request for information and data was responded to late.

It was worrying that the first few steps in the SCM process were not followed, but payment was in most instances, efficiently executed. It was the first and the second level of the SCM process that was susceptible to fraudulent interventions. The fact that the last few steps in the process were done well, showed that dereliction of duty by officials was not as a result of ignorance, as they were aware of their responsibilities, but neglected to follow proper procedures in the first few steps of the SCM process.

Tenders are an integral part of the SCM process. The PSC’s evaluation was alarming, especially given that only 2% of transactions within the R200 000 threshold was sampled. The threshold, has subsequently shifted to R500 000, which meant that there was a larger amount of transactions that did not require a formal tender process to be undertaken.

4 Conclusion

The findings of the evaluation identified major shortcomings in the application of the prescribed procurement policies, procedures and controls. The lack of thorough and comprehensive documentation of the approval of reasons for deviations from prescribed procurement procedures is of serious concern.

Record-keeping of invitation of quotations, the number of quotations, deviations, evaluation of quotations and communication of successful suppliers is particularly weak. These shortcomings make the procurement process highly susceptible to the risks of maladministration, fraud and corruption. The lack of proper recordkeeping also results in inadequate audit trails

The lack of recordkeeping contributes to the likelihood that the allegations of irregularities in procurement may not be successful in that the high number of control of weaknesses identified will themselves disguise irregularities harder to uncover.

The findings of the PSC Report, and its recommendations are supported by the Committee.

5 Recommendations

The Committee recommends as follows:

1) Ministers and MECs should report to the National Assembly the implementation of the following recommendations by 29^th October 2010:

· In order to ensure the integrity within the SCM process, departments should continuously be supported by ongoing training, education and communication of the due SCM process.

· Audits of the SCM process should be aimed at identifying weaknesses which contribute to fraud, corruption and other irregularities. Such audits should not only be in the form of generic internal audit reviews, but also on remedial action, which is in many instances delayed.

· Departments should perform regular fraud detection reviews, which should ensure timely identification of potential fraud and other irregularities.

· Departments should ensure that the same officials should not be assigned the responsibility of requesting quotations, evaluating quotations and making recommendations on the appropriate entity to who an order should be placed. These different steps in the SCM process should be assigned to different officials to ensure the segregation of duties and thus to strengthen control over the process.

· The procurement process should be adequately supervised. Such supervision should ensure that the process is dealt with in a transparent manner and that adequate records of all phases of the procurement process are maintained. It should also be ensured that the necessary authorisations within the confines of the delegations of authority be obtained.

· The timely and accurate reporting of suspicions of fraud, corruption and other irregularities by all employees should be encouraged by management and specific mechanisms to facilitate whistle-blowing within departments should be developed and implemented in accordance with the Protected Disclosures Act, 2000.

· To mitigate the fraud risks associated with requests for quotations, such as irregularly favouring a service provider by providing incorrect information to competing service providers, the issuing of a formal request for quotations should be compulsory across all departments.

· In instances where less than the prescribed number of quotations has been obtained, deviations should be recorded in writing and authorised in terms of the delegations of authority.

· Payment of invoices should not be made in the absence of the original quotation submitted and a copy of the original order attached to the original invoice.

· Legislation and regulations make provision for the compilation of a list of prospective service providers per commodity and type of service. This list should be updated quarterly and all quotations should be invited from such a list. Enforcement of adequate service provider probity before inclusion on the supplier database limits the risk of different service providers with the same owners supplying the same goods / services being included on the supplier database.

· It is critical that all officials involved in supply chain management declare all interests including actual, perceived or potential on a regular basis. They should also sign confidentiality agreements not to disclose any information received during the procurement process. This will address the risks of giving preferential or prejudicial treatment or undue advantage of information in favour of a particular service provider and conflicts of interest.

· It is also critical that departments conduct ongoing performance evaluations of suppliers contracted to departments. Departments should be evaluated in areas such as quality of services provided, ability to meet deadlines and total costs incurred by departments to deliver services.

2) The KwaZulu-Natal Department of Housing, the Western Cape Department of Public Works and the Eastern Cape Department of Housing should report to the National Assembly by the 28 May 2010, reasons for their non-submission of information to the PSC for its investigation into the Evaluation of Supply Chain Management Practices within the R200 000 threshold.

3) The National Department of Public Works should supply reasons to the National Assembly for its late response to PSC’s request for information in its evaluation of Supply Chain Management Practices within the R200 000 threshold.

Report to be considered.