Office of the Chief Procurement Office: progress on procurement reforms

Meeting report

Office of Chief Procurement Officer (OCPO): Overview

Mr Schalk Human, Acting Chief Procurement Officer, said procurement would be between R500bn and R600bn for goods and services, transfer payments and different spheres of government, which was an enormous amount of money that could certainly do a lot of good in South Africa. Globally there had been some cold winds which had impacted on the economy of South Africa and there were trends in procurement that mainly put a lot of pressure on chief financial officers (CFOs) to reduce costs, to make sure that risks were managed, and to ensure that school books were delivered on time and that meals were delivered in the right format and at the right time at the right hospital.

He said the world of information technology (IT) was impacting in a significant way on how business was conducted, and the digitalisation of government was also affecting procurement. The CPO would therefore like to share some of the initiatives they had undertaken in the modernisation of procurement, which really started off with the Cabinet resolution in 2014 where they were instructed to finalise the legal framework. They would brief the Committee on the work done regarding the Preferential Procurement Policy Framework Act (PPPFA) regulation that was promulgated in January and came into effect on 1 April, and would touch on the draft Procurement Bill and what the main modernisation imperatives would be, as well as some of the contract management reforms they were undertaking.

The CPO would also appraise the Committee on the measures taken to automate procurement, such as the central supplier database e-procurement, the e-tender portal and other digital tools which helped them to automate this process. Apart from that, a differentiated approach to procurement was very important. For a long time, the CPO had bought through quotations, tenders, transversal contracts and emergency procurement. It was maybe time to explore other ways of procuring wealth.

The constitution was clear that procurement must be done in a fair and transparent way. It needed to ensure cost effectiveness and at the same time, the CPO wanted to see equity in the procurement of state resources.

Public Procurement Bill

Mr Human said the first item was the Public Procurement Bill. They had had the opportunity to study 100 different international bills, and what they had tried to accomplish through this bill was to take the South African context into effect and provide for a developmental approach that was in line with the National Development Plan (NDP). What this meant was that they made provision for supplier development and on-boarding. It just did not make sense to develop suppliers and tell them, “now compete and hope you succeed!” Nobody would make an investment like that and then leave it to chance. They had also taken concepts like targeted procurement quite seriously, and the intention was to eventually repeal the PPPFA Act. The constraints of that Act were that it limited preference to a 80/20 or 90/10 concept, depending on the threshold, and the CPO though they should be taking much bolder steps when it came to empowerment, targeted procurement and preference.

This bill was an attempt to modernise the process. It had been discussed with government officials --the technicians who had to make it succeed -- and they had consulted with just over 10 000 officials in a number of provincial, national and entity engagements. They had received just over 1 000 inputs. The draft bill had been submitted to Cabinet, to the former Minister of Finance, and with the change of the leadership they had resubmitted the bill, and very soon Minister Gigaba would present it to the Cabinet with this purpose in mind: to embark on a very comprehensive public consultation process. They could give the Committee, as Members of Parliament, the assurance that it had been discussed widely and thoroughly with all stakeholders. Something as important as procurement certainly deserved that kind of consultation.

Mr Human said they foresaw that the challenge would be to deliver by their initial target of 1 September, but they thought they would be able to make up the time. However, it was important enough to make more time available for consultation and come to Parliament a month or so later than anticipated. This would provide opportunities to consolidate more than 50 different pieces of legislation addressing procurement but which confused the environment, fragmented the intent and diluted the procurement asset of government. The more pronounced benefits of this bill were that it provided flexibility and agility for accounting officers to align the procurement practices to their businesses. Health and Transport were very different, and there would be more appropriate ways of procurement in those industries.

The Procurement Bill also addressed the consequences for wrong doing. Many different pieces of legislation in the past provided for steps pertaining to financial misconduct and accountability, but they had never been pronounced enough for there to be actual action when wrong-doing took place, and they hoped that they would be able provide some inputs as to how they could do this smartly and wisely.

The Preferential Procurement Act regulations came into effect on 1 April, and the significant change from the 2011 regulations was that it now provides for pre-qualification. Regulation 4 provided for four different types of qualifications:

• The first provided for tenders that were designated to certain groups, and that in practice meant that departments or entities of state could determine that a tender was only available for Black Economic Empowerment (BEE) level 1, for example.
• The second provision would be subcontracting to 51% black-owned women, youth, military veterans, rural communities, cooperatives, disabled persons, as well as small businesses. These tenders were available only when they were advertised for those designated groups.
• The third area was providing for local content, where tenders were available only for manufacturers that subscribed to or comply with minimum provisions.
• The fourth section would be on sub-contracting, where a tender was advertised with compulsory sub-contractors. The premise of this regulation was that suppliers updated their ownership information. The opportunities that this presented was that the compulsory subcontracting of R30 million would break down monopolies and create opportunities for newcomers to gain access to procurement opportunities without having to compete with the likes major companies with huge capital resources. There was also an opportunity for new players and smaller players to also access big procurement opportunities.

Mr Human concluded the issue of legal reform by appraising the Committee very briefly on commercial contracts. The CPO thought it was necessary to review the general conditions of the contract, to provide for sub-contracting specifically to align with the BEE codes. They had also received inputs from the industries where the shortcomings were, and they would finalise a new contract management framework this year. They had analysed and reviewed quite a number of big procurements in a legal way, and the previous CPO had informed this Committee last year that some legal capacity had now been established in the Office of the CPO. The result that they reported here was just a snapshot of some of the reviews that they had engaged in. He said technology was very powerful, and the Committee would be briefly appraised of some of the automation that the CPO had been involved in.

Supply Chain Management automation

Ms Nokuthula Simelane, Director: Supply Chain Management - Information and Communication Technology (SCM ICT), Office of the CPO, said that there had been a lot of improvements in the ICT area in an attempt to automate SCM for government. The main reason for automating was to ensure that they made things easier for both suppliers and practitioners in government. One of the initiatives that had been taken was the introduction of a central supplier database, with the main purpose being to improve efficiency and make sure that the process was simpler. Currently, they had 468 000 users of the system and more than 327 000 suppliers on the supplier database. They had also catered for the new PPPFA regulation, where the practitioners would also be able to search for a designated group and at the same time, the suppliers would be able to capture the information or update their details in terms of ownership and their location.

A challenge had been that at the municipalities, they had not yet reached the level that they had aimed for in terms of utilisation of the system, but since the system was being implemented across all spheres of government, they were doing very well at both the national and provincial levels of government. The municipal area was where they needed more improvement. The opportunities for the suppliers in using the system was that they saved a lot of money, because they did not have to go to each and every government department to register, but they registered once and were able to do business with government. In addition to this central supplier database, they had an e-tender publication portal that published tender opportunities as well, to improve transparency, because on this platform they also published the awards and notifications such as counselling services, if any, briefing sessions and other things like that.

The organs of state that were publishing on the internal publication portal were now about 486 000. Also in this area, they had about 77 municipalities that were utilising the e-tender system. The reason for not full adoption was because it was not yet compulsory to use the internal publication portal, since there were other means where the tenders were being published, so the legislation had a mandate to make it possible for all organs of state to use e-tender. On a daily basis, there were about 5 430 users on e-tender so it made life easier for smaller businesses, because they viewed opportunities without spending money and were able to access the e-tender publication portal see what opportunities were there. The documents were free of charge, and they also saved having to buying the tender document because they could view and see what the requirements were.

Ms Simelane said they had already started with e-procurement for government and were now focusing on transversal contracts. There were about 47 contracts that were already loaded on the system, with a number of items that were there. The good thing about e-procurement was not only the transacting part of it, but also that there was an on-line catalogue where items could be seen with their pictures, specifications and price. This made it easier for the practitioner to procure and there was also a shopping basket where they could shop and choose what they needed to procure. In the near future, they would like to ensure that the system was linked to their financial system so that they would be able to see if there was a budget available for a lined item. This would help a lot in saving money for paper and printing, and the processing time would be shorter as well.

All these initiatives were already in place and they were proceeding with enhancement to make them more accessible and helpful in terms of transparency and oversight. All of this made it easier to get information, because without information one could not plan to improve.

Mr Human highlighted that there was a fact sheet which they had handed out, and a major concern was that only 57% of the suppliers on the database were tax compliant. Previously, practitioners had had to have a paper copy, and SARS had told them that at least 15% of these certificates were fraudulent. Electronic means enabled them to validate in real time when the tax status was current and established in real time what the tax compliance was. It was important that government did business with suppliers that paid their taxes and paid them on time. There were 474 companies owned by disabled persons, about 650 by military veterans, and quite a number of women- and youth-owned companies. At the moment, the database consisted of 51% or more of black-owned companies.

He said it was interesting that a lot of young people used the technology. On average they were 35 years or younger, and most of the users were in this group. They had also noticed that there were quite a number of international downloads, and the largest number came from Kenya, America and then India. These international companies had to comply with the BEE legislation and tax legislation in order for them to be able to compete. They also provided a snapshot of the different commodities. He said technology allowed them to give effect to the PPPFA regulations when they said they wanted to give a tender to women-owned companies, as they had data to establish whether there were women-owned companies dealing in those commodities.

Strategic Procurement Framework

Ms Estelle Setan, Chief Director: Strategic Procurement, OPCO, appraised the Committee on what strategic procurement was, and what the strategic procurement framework was about. The basic principle about strategic procurement was that they had to look at the value chain and a differentiated approach to procurement. The first differentiation they had was the difference between the way they procured business services versus infrastructure, but within business services there was also a differentiation. One did not buy capital equipment or medical equipment the same way that one would buy stationery, so that was basically a model which they had put together to differentiate between the different kinds of commodities that one could procure. Each one of these categories would have a different approach to procurement, so although most of them ended up with some kind of procurement method, the crux was the research that was done up front informed the decision makers better on their approach to the market, and there was also contract management and performance management afterwards.

She said the strategic procurement framework had been developed and had been web enabled so that it could be found on the National Treasury’s (NT’s) Public Finance Model (PFM) portal where it was an easy walk through the process and was supported by document methodology as well as a good practical guide, which took you through the process almost like “strategic sources for dummies”.

Mr Human interjected, and said that it was important for buyers in the public sector to buy smartly. They often found that buyers in the public sector were excellent at compliance, but they still paid very expensively for commodities which one could buy in one’s personal capacity quite cheaply. That was why the strategic procurement framework was so important, as there was a differentiated approach that gave proper guidance to practitioners, and Members of the Committee could have the assurance that there was value for money. Ms Setan and her team would roll this out and he hoped that they would see a decrease in price, a decrease in the total cost of ownership and many more creative ways in sourcing than they had done until now.

Ms Setan said that with the Department of Health (DoH) projects, one would find that strategic procurement or strategic sourcing was a very much a collaborative process and all their projects were done in collaboration with their clients’ Department at both national and provincial levels. The CPO was looking at about five categories -- medical equipment, hospital catering food services, hospital cleaning, linen and laundry services, and waste management services. These were commodities identified by the DoH as quite critical for them at the moment, and where they desperately needed some assistance not only in procuring, but in analysing the complete value chain to understand if their current models were proficient or not. So the strategic procurement was not only about a procurement process, but it looked at the efficiency opportunities as well in the process.

What they had found, for example, was that the hospitals and facilities would procure laundry equipment and have it sent to them, but in one of the facilities one of the ladies was washing the laundry by hand, and the laundry equipment was still in its plastic casing -- not commissioned, and people not trained on how to use it. In another example involving laundry, they had found that in Cape Town and in Gauteng they had models of specialised storing and procurement, dispensing and disposal which was brand specific just to that hospital, and not to the province. With this project, they had completed the diagnostics and would be presenting the actual strategies to the Minister of Health at the National Health Council some time in June.

She said travel was a very emotive subject, because NT found that about R10 billion per annum was being spent at just the national and provincial level. This included the payment for travel agencies, hotel accommodation, car rentals, venues for conferencing and the like, and it was the fifth highest level of expenditure. This was their core business, and they needed to look at how they could efficiently reduce travel spending, and after a lot thinking they had found out that there was no strategy that would suit everyone.

Therefore what they had done was to develop a national travel policy framework which had been published in April and gave the departments guidelines on how to deal with this industry and how to deal with behaviour inside of government. The departments were supposed to take the framework and write their own institutional policies and follow standard operating procedures to make it practical. The CPO wanted to diversify and expand the supplier base. They had established a standardised specification for the government to use when they tendered for travel business, and they wanted to retain the local businesses.

What was important and had turned the industry upside down, was that they had changed the face of their business model. Every agency would use an online government tool as opposed to using their own solutions.

Mr Human interjected again, and said that they that one could book a ticket from Cape Town to Johannesburg for R2 000, but if one was from government it would be R6 000, and “that was quite perplexing.” This new model had upset the strategies of the suppliers. The intention was not to cause job losses, but they would certainly like to see some value for money coming through. Ms Setan’s work had consolidated that work a bit. Data was extremely powerful, and he would like to see his colleagues appraise the Committee on the thinking about data and transparency, as well as the use of electronics in education.

Ms Setan said one of the exciting projects that they were busy with was procurement data transparency. In government there were more than 280 different supply chain applications, and they all got aggregated up to the Standard Chart of Accounts (SCOA), which was a financial classification system, but it did not have a procurement or item classification system. They had received co-funding from the Industrial Development Corporation (IDC) to start with this project, and they would use the logo database as the minimum to start item codification, and from codification it would go to a classification process where they would use the United Nations Standard Product and Services Code (UNSPSC). Across government they had a single source of codification and classification so that they did not disagree on what a product was called, so that even at the procurement or purchase order level, they would know exactly what they were buying and would aggregate it at any level.

Ms Setan said in education they were working on two projects. She was not going to expand too much at the moment on the learner teacher project. What was exciting was that they had developed a framework for e-education and had various interventions with regard to the procurement of IT, or IT-related strategies, which actually linked everything together. They had developed the framework for e-education and presented it to the Department of Education, and they were enthusiastic about taking it forward as the basis of their operation. This would help the schools at the lower levels to determine if they were actually ready for implementing IT at different stages. It would help with the demand planning and procurement planning, in terms of their readiness. Thus it would change the face of IT.

Procurement savings

Mr Kenneth Pillay, Chief Director: Transversal Contracting, said there were 70 transversal contracts and they amounted to R62 billion. The avenue was broken up into six categories: health and medical technologies, vehicle equipment and services, textiles, ICT, property and education. For every transversal contract that the Treasury puts together for government, they saved around 20% to 30%. For example, the total value of the state vehicle contract over a period of two years was R13 billion, and their computation tells them that they had saved a total of R2.3 billion with those contracts. If anyone could show him that they could buy a car cheaper than on the transversal contract that the NT had, he would probably resign. If state institutions were not using state vehicle contracts, then they were probably buying vehicles more expensively. The Committee could help by deeming those purchases as fruitless and wasteful expenditure.

Another example was mobile communications, where they had awarded a contract last year, and the contract had had a twofold phase to it. The service providers were target driven, and in this category they had achieved savings of 40%. They had changed the model from a subscription-based model to enterprise services for government. He asked why the government should buy the same subscription as the man on the street, when they could actually do things radically differently.

The second phase in this project was they used technology to jump-start the service delivery device. Why should there be medical pharmaceutical stock outs when they had technology that could in real time alert service providers that there was a stock out at a hospital, or that there were extra suppliers that were alternatively cost effective? The second phase looked into how they could build intelligence into their procurement, using technology. Imagine the possibilities if the police vehicles had a geo-tech camera, and citizens could actually take a photograph and geo-locate and map it into the system using a smart application which received mobile notifications.

He said that on the health side, the savings looked small, but if they were considered in the context of a difficult foreign exchange environment, they probably would have registered between R500m and R1bn. They had been finding the foreign exchange environment very difficult, but together with the DoH they had managed to reduce costs anyway.

There had also been a re-negotiation of their Microsoft account, which would see savings of up to R1.5bn over the next three years. This came with the reduction of the investments to one government rate, as well as a standardisation of the rates. Both these contracts had gone to Microsoft, who had been asked to charge one rate for government instead of charging them as 700 institutions of the state.  They asked for the different levels of government and hospitals to not be treated differently. In total, they had made a R7 billion saving, and this coming financial year they were planning to register savings of R16 billion, and in the third year, R26 billion.

He said the on the health side, they had quite a few projects going on, one of them being for condoms and surgical gloves. They spent about R4 billion and most of that money went abroad. South Africa was currently the biggest buyer in the world when it came to condoms and anti-retrovirals (ARVs) yet it did not manufacture them. The problem with the condom was that the latex was not available in the country. One needed to change nature of the transaction, like buying the material separately and producing them locally.

It was the same case with ARVs, where the big problem was the active product ingredient (API), which was manufactured by the Chinese and Indians. The key was to buy the API and manufacture it locally. South Africa was the largest consumer globally, and probably dominated about 90% of the world’s consumption. Buying the API and manufacturing ARVs locally would allow jobs to be created and get people off the streets, and the country could become the supplier to Africa.

He there were many other projects, and posed the question why jobs should be advertised in newspapers when there could be a government portal where jobs were advertised. This process should be modernised, and they were busy see how they could advertise jobs online by also using cell phone and web technology. The key issues were not only about saving, but transformation of industries and job creation.

Government monitoring and compliance

Mr Solly Tshitangano, Chief Director: Supply Chain Governance, National Treasury said their job was to ensure that suppliers bid for tenders, and when officials in government institutions assess, evaluate and adjudicate the tenders, they did so according to the SCM legal framework. Their pre- and post-award reviews had revealed that there was a lot of abuse in the way quotations were received and in the way bids were received and assessed. In order to stop the abuse, they had done some work and had proposed some mergers.

The first proposal was that suppliers must have equal opportunities to bid, and what they had done to ensure this was to make sure that the procurement plans were published, because in the past some suppliers had received the adverts for tenders before others. In this way, suppliers could plan in advance if they wanted to participate in the tender or not. This assisted in holding the accounting officers and accounting authority accountable.

If one looked at the Auditor General’s (AG’s) report summary each year, one would see that irregular expenditure was increasing. One reason it was increasing was because of competitive bidding. Institutions would procure through deviation, and they were allowed to do so only if the situation was urgent, otherwise they have to approach the NT, whether be it at the provincial or national level. An area of the supply chain where they had a problem was the implementation of remedial action, because if an official had abused the supply chain management process, they needed to cancel the contract. If there was a criminal element, they would be reported to the police, but the criminal investigation was not effective, so those who did wrong continued because there were no consequences for their misdeeds. These were some of the challenges they faced.

Stakeholder and client support

Ms Rakgadi Motseto, Chief Director: Stakeholder and Client Management, OCPO said the challenge they were facing was that their suppliers do not know much about the government’s supply chain. Their understanding was that they saw the supply chain only when they were procuring advertised tenders, and they tended to think that the supply chain and procurement were different. The CPO had done a community radio campaign to inform their suppliers that they needed to understand that they also had to start planning when government started planning the allocation of resources, instead of waking up when the tender was advertised. They had also taught the suppliers where they could find information and what to look for when they went on to the website. They had worked with the Department of Military Veterans to establish an SCM unit.

One of the achievements was that they had taught the suppliers what the government really did, how government bought, when they would be paid, and why they had not been paid when they were supposed to have been paid. Throughout the campaign, what they had picked up as main challenges was funding. They had funding that was there for the big tenders, but for emerging businesses those suppliers were not funded when they went to government institutions, or whoever was supposed to fund them. They did not have funding for the small tenders. Another challenge was the 30-day payment schedule, where the main sector that struggled to pay suppliers was the Department of Health. As a result, one sat with suppliers who were supposed to provide critical services to district hospitals, but who could not continue to supply because they had not been paid. On the travel side, there were departments who would exhaust travel agencies. Instead of paying one, they would move to another one to avoid dealing with the debt that they had incurred. Most suppliers did not understand what it meant to do business with government, like how the government planned and bought.

Mr Human said the CPO thought that this Committee could really assist when they considered appropriations of departments to places where they used transversal contracts. The unit costs on those contracts were way below the market price, and this would really create some fiscal space for the departments which were pressure to deliver on their mandates. Currently, the use of transversal contracts was discretionary, and he was yet to find a reason that was convincing enough for not participating in those tenders. The second area was strategic sourcing, and this was very much the in the Health and Education sectors, and they needed to consolidate those. There needed to be collaboration with suppliers, because collaboration meant that there would be product innovation, providing relevant products at the right time, at the right venue and the right price. State Owned Enterprises (SOEs) spent a lot of money, and they hoped to improve in the next years through collaboration. Billions of rands went into the procurement of tenders for SOEs like Eskom, Prasa, Transnet and the SABC. There were quite a number of provisions on oversight structures in the legal framework, and the Committee’s role here was critical and was appreciated, because they asked very probing questions and kept them honest.

He said that when the Committee considered the appropriations, asking pertinent questions with regard to demand plans, sourcing strategies and strategies regarding cost reduction, cost avoidance, and cost savings, would help a lot. There were a lot of innovation and procurement practitioners available, and they should be heard. The CPO tried to make optimal use of what they bought, because they would see that a department bought very expensive IT equipment and then used only a fraction of it. There was also duplication, because the SA Social Security Agency (SASSA) and Home Affairs had the same identity management software which they had bought, and this had cost money which could have been consolidated across departments.

Discussion

Mr M Shaik Emam (NFP) thanked the Department for a very insightful presentation. It was good to know that they would be saving a lot of money, and therefore they could do a lot more. Even the retailers in this country were “taking the poorest of poor of our people for a ride.” If one looked at the supermarkets, one would find that a 2kg bag of sugar was exactly the same price as it was in another shop. The price of motor vehicles was standard if one went to all the dealers, and they were all overpriced. If one bought it today for R500 000, the next day it was worth R150 000 to R200 000 less.

He said his concern was in terms of the pricing, and how they decided what an acceptable price was, because one would find that a product costs R10 in one province, and R50 in another. Who dictated this pricing, because one had to find that out well before the tender was issued and the budgeting process? The Committee wanted to know which departments were not buying into this idea, so that they could interrogate them as to why they were not buying into a system which would enable them to save a lot of money. Regarding the R4 billion leaving the country due to the importation of surgical gloves and condoms, he asked whether they had created platforms with the Departments of Trade and Industry and Economic Development in order to create jobs. They had brought this up before, but what they were not seeing was the implementation.

He asked how they were going to prevent a contractor who qualified in terms of their grading to build a R50m or R60m school, but the same contractor would get another contract for another school. This had led to him and his colleagues to find two schools standing, but with no money to go ahead with the building project. Where the government could assist was to supply the contractor with the material, because contractors could not afford it.

Dr M Figg (DA) said that the legislation was not being enforced, and he would like to know the consequence for people not complying with the legislation, because it referred especially to the designated groups and to Small and Medium Enterprises (SMEs) which could not survive a month without payment of an invoice. The challenges outlined in the implementation of the tender processes were very disturbing to see. He mentioned two things, the first being interference, and said he wanted to know who was interfering. Secondly, it had been indicated that it took six months to a year to fund a tender again. He said it did not cost the suppliers anything to get the tender, except for the tax certificates which they have to pay for. Why could the red tape not be reduced? He asked why creditors were being called “accruals,” as an accrual was something for which one made provision and might not have even incurred the expense. When one had a creditor and did not pay him, that was something different -- it was not accrual. He wanted clarification for why it was said they did not have money because of accruals, and asked what their understanding of accruals was.

Ms D Senokoanyane (ANC) said it was known that there was a lot of wastage in government, but when one saw it down on paper it was quite frightening, but she commended the NT for the good work that they were doing. In terms of buy-ins, they had adequate political buy-in on issues like buying more vehicles, travelling and accommodation. These issues were some of the “hot potatoes” because people wanted to defend things without really realising their impact on the fiscus. The fiscus could not cope “when we continue to do things as usual,” so she expected them to reflect on what was happening in this respect. She would like to get a sense in terms of the aggregated procurement figures, showing how much was spent on designated groups.

She also asked about the radio campaigns, whether they had been able to reach new suppliers through this campaign. The issue of payment in 30 days had become like a thorn to all of them, and they had got a huge task on their hands. She saw that there was an amount of R380 million which was still owed to suppliers and asked who the culprit was, the government or the suppliers. This was causing some suppliers to close down there businesses, and she wanted to get a sense of what exactly was happening. She said if they did not have enough capacity in the Department, then they were in trouble.

The Chairperson asked about the organs of state and SOEs that had not implemented the revised PPPFA regulations, and said that as a Committee, they would like to have a list of these institutions which did not comply. It would be of equal importance if they also got a list of those that had implemented the regulations, so that they could be recognised. She referred to the OCPO’s statement that “the greatest concern was that the rollout of ICT in schools had not been implemented with the expediency it deserves in the last ten years,” saying that there had been similar challenges in Health as well. The World Economic Forum had stated that African countries were not equipped for a transition to a Fourth Industrial Revolution, and she asked why this was the case, what the bottlenecks were, and what the timeline was.

Department’s response

Mr Human said he would ask Ms Setan to share with the Committee her experiences with the price referencing system. It was something that they had investigated to determine why a loaf of bread in Limpopo was R20 and in another province was R10, and if one looked at the buying volumes, that it should actually be R5.42. He said that the new PPPFA regulations allowed the organs of state to negotiate the prices if they were higher than market-related prices after the competition had taken place.

Ms Setan said a couple of years ago she had to look at a pricing reference system which they had started to engage on with Statistics South Africa (StatsSA) to get retail prices for common goods. The problem that they had faced was that although they could get some reference prices, the departments could not use them because of the lack of a common identification system. The prices which StatsSA gave them per province did not take into consideration the distance, so they had abandoned it as it did not serve the purpose it was meant to serve. They were doing research on travelling so that they could have an independent view on that.

Mr Human said he thought the issue was how the CPO made sure that the state was not being exploited. A price referencing system could be one way. He thought that the school cost model was a good example, and if an agreed upon price was exceeded, then there should be an explanation why. Another solution was setting maximum rates for travel, or for commodities such as computers, and if the market-related prices were exceeded, that must be considered as fruitless and wasteful expenditure. The Department had also come up with 68 ways in which costs could be reduced, and they could provide that to the Committee should the information be requested. The key commodities were medical equipment, motor vehicles and medicines. They would also submit a report on 19 May listing all the SOEs not participating in transversal contracts.

Mr A McLoughlin (DA) referred to page 13, and asked if there was any chance that they could get the reports referred to in page 13.

Mr Human said that those reports had been finalised and submitted to the board, and they were waiting for the board. That was when they would be able to give out the reports for public engagement and scrutiny from the Members of the Committee. He said the 30-day payment requirement was quite a problem, and remarked that it was heart breaking when a supplier wrote to them informing them that their houses or cars had been repossessed and they could not send their children to school because the government had not paid them.

Mr Shaik Emam asked if it would be possible for the Committee to get a quarterly report on all those departments that were at fault in terms of payment within 30 days.

The Chairperson said she did not think that this would be a problem.

Ms Rakgadi said when they talked about accruals, these came about as a result of procuring entities not adhering to their demand plans. She said the entities procured services and commodities and did not pay, so it was money owed to suppliers, whether or not the state organs had money. It was the debt that needed to be cleared so that suppliers could get their money. It kept on growing because what the entities did when they received new funds depended on which supplier they should pay first. Some did not have complete documents in order for their money to be paid out, so accruals were the money owed to the suppliers. With regards to the amounts of R224m and R392m, this was the information that they had received directly from the suppliers since they had started working on 30-day payments. Most of what was paid the suppliers had the required documentation, but the problem was that suppliers sometimes got into arrangements with supply chain practitioners without having the proper documentation, so if the practitioner was not there, somebody would ask for a purchase order or a letter of confirmation to make sure that they were appointed, and if those documents were not available it became difficult for them to resolve the matter.

The one challenge referred to contractual disputes where there were no proper documents for someone to be paid, and the other referred to the departments just saying that they did not have money or were waiting for Treasury to transfer money to them. When the departments received the transfers, they paid the biggest ones and the others remained unpaid. When it came to whose fault it was between the Department and the suppliers, she said it depended on the parties involved, because a supply chain practitioner knows that one had a process to follow, that one needs to ask the suppliers to submit information, and one needs to evaluate the purchase order. On the other hand, there were suppliers which were sitting with an appointment letter, but were doubting that letter. She said sometimes it was twofold issue -- sometimes the suppliers did things knowing very well that they were wrong.

With regard to capacity, she said the concern with OCPO was that they might be moving very fast with their reforms. This was not a bad thing, but the stakeholders who were supposed to be working with them in this regard had not woken up to it. It required a very proactive level of application when it came to transforming the industry. They were engaging the National School of Governance to train the practitioners, senior managers and administrators in order to help them achieve what OCPO wanted them to achieve in terms of the regulations. She said the radio campaigns went on for four weeks, and were in English and Afrikaans and indigenous languages. They went to 45 radio stations out of 64.

Mr Human said the best way to deal with the 30-day payment issue was to use delegation. They made those who were responsible for payments -- typically the Director of Finance – aware that the payments process must be a key performance area. An invoice should not be treated as a piece of paper because it was a person, it was a business, it was a family and there should be disciplinary processes if that was not done. They hear complaints that there is no money in the budgets, but his question was “how do they then compile budgets?” He would also ask, “how could this now be the supplier’s problem if the costing was not done properly?” This brought into question the cost accounting which led to the budgets. Another way to deal with this was to “name and shame,” and identify departments which did not pay invoices. The departments must also be held accountable by Parliamentary committees like this one. It might be tough, but he believed it was not unreasonable.

The Chairperson said they were looking for solutions to this problem, because it existed at every level of government. She urged them to find a solution, especially now that they were talking about inclusive growth through radical economic transformation, as poor businesses would suffer when they did not receive payments. A solution was imperative and must be worked on and achieved within the next two years. This was their responsibility as leaders, and they had to find a solution.

Ms Simelane referred to the utilisation of the Central Supplier Database (CSD), and said the statistics had been shared with Parliament in March. The majority of institutions which were not using the system were Schedule A public entities and there were about 28 of them, and 3C were around 33. The rest were Schedule B, and there were only about three to five which were not using the system. . There had been improvements with municipalities, since the majority of them were now using the system.

Mr Human said that it was important to differentiate between organs of state which had subscribed and were able to log on, but were not using it. Their definition of using the system would look at how departments were able to procure but were not using the CSD for a week, or once every two weeks for smaller entities. Once every two weeks would be their timeline to check whether the system was being used, if that was acceptable to the Committee.

The Chairperson asked the members if they were happy about that and asked if honourable member Senoakonyane wants to comment.

Mr Human said they had another grading for a R60 million school, where the supplier sub-contracts to somebody else, and asked Ms Setan to comment on that.

Ms Setan said they had developed standards for infrastructure procurement and delivery management which they were currently rolling out to departments in the provinces, as well as in municipalities. She would like the Committee to forward the information they had to them so that they could investigate what happened there.

The Chairperson asked Dr Figg to submit to the secretaries the documents which they required.

Mr Shaik Emam said that contractors should be rejected if they did not comply with government policies because a school was required to have facilities like sports grounds, and they as Members had come across instances where they had gone to a school and had not seen any sports grounds or other required facilities.

The Chairperson said there were also “state of the arts” schools and hospitals, and when they went there, they would find that there were no personnel. She said this must be regarded as fruitless and wasteful expenditure.

Mr Human said with the Department of Education there had been norms and standards which had been developed for schools. It was the same for clinics and roads, where there were standard costs which must not be exceeded. He would like to put up a flag for the disabled, women and youth owned enterprises, but he saw that the lighting was bad and therefore he would provide electronic copies. The PPPFA regulation was also used to determine what the cost of using these designated groups was. In 2016, 230 organs of state had registered these kinds of companies, and 60% of awards were not given according to the ownership information. They wanted to know how much money went to 100% of the black-owned companies. The provinces were at very different stages of empowerment, and there were areas which had not been transformed, like medical supplies, leasing and properties, but the catering, stationery and office equipment, and supplier industries were more transformed. He said other information about how many black, women, youth and disabled owned enterprises had been given projects would be provided in the meeting scheduled for 19 May.

Mr Shaik Emam said with stationery, the challenges were with prices. He had spoken to the manufacturers and they were not doing business with government -- instead there were middle men who sold these products to government. He said these middle men exploited the prices and that was the reason why prices went up.

The Chairperson said she would give the Members a final round to ask questions and they must pay attention to the time constraints.

D Figg said the cost factor had to be resolved. For a large to medium enterprise to charge the same amount for services as a small one might be detrimental to the business of the small enterprises if they were not able to compete. He wanted clarification about that.

Mr McLoughlin said they were doing a very valuable exercise right now. He asked if there was no fear that the suppliers would just render a service to government without taking into consideration the quality, and drop the quality because the demand was for a lower price.

Ms Senokoanyane said was reminded by Mr Shaik Emam’s mentioned of the middle man, that in her province hospitals were being charged R16 for a loaf of bread when it was still R8 at a retail store. The middle man was getting bread from the bakery and selling it to the hospitals.

The Chairperson said she wants to know whether other parliamentary committees knew about OCPO and were making use of their services. She mentioned ministries like Transport, Education and Health, and asked how they had been involved in their parliamentary committees. She also asked if they had attended any budget votes which were currently place.

Mr Human said they were called to quite a number of hearings. These included the Standing Committee on Public Accounts (SCOPA), the Department of Trade and Industry (DTI), and the Department of Public Enterprises (DPE), but these were not comprehensive consultations. They were not called regularly to attend these meetings, except for SCOPA. Concerning beating the system, he said there were a number of checks and balances in place, like the Compensation Tribunal. There was a tendency towards carteling in this country, and they were quite diligent when it came to transversal contracts, and took steps against suppliers and restricted them. There were also penalties, but this did not happen to all organs of state.

Mr Pillay said the OCPO met the supplier industries and did intense research to check prices. They talked to the IDC and DTI to look at funding models, and this process took 18 months. He hoped that some of the technology came online, as some of these issues would be resolved, particularly for prices, so there was a lot of work going on here. He said they must choose between big and small ticket issues. For example, pharmaceuticals were a big ticket issue, because approximately R4 billion annually went to them.

The Chairperson thanked the delegation for their responses and said that they could see that this presentation was relevant. They could not keep going because of time constraints, but she gave another Member an opportunity to make a comment.

Dr Figg said he did not understand why the problem of overpricing persisted, because the price was set when the purchase order was attained.

The Chairperson invited Mr Human to make a closing statement.

Mr Human said that the work of the Appropriations Committee was important, because billions of rands were appropriated for ordinary South Africans, which they saw daily in the order of business. His team was committed to supporting the Committee and working with them.

The Chairperson said OCPO was one of their main stakeholders and there was a need for a strong relationship between them, through receiving quarterly reports from them. There was a need to partner with them for effectiveness, efficiency and ensuring value for money in government procurement. The key issues flowing from the presentation were the inefficient public sector supply chain management, which included suppliers charging certain prices for goods and services contracted for, service delivery being of poor quality and unreliable, corruption and wasteful expenditure.  The Committee’s role was to turn the situation around, and as long as these challenges persisted, then they had not done their work properly.

Matters for Committee consideration

An official stated that the Committee should consider and report on spending matters whilst focusing on the Medium Term Budget Policy Statement (MTBPS), the Division of Revenue Bill, the Appropriation Bill, the Supplementary Appropriations Bills and the Adjustments Appropriation Bill. When the Committee wanted to consider any amendments to the Division of Revenue Bill (if materially unchanged), the revenue Bills or the Appropriation Bill must be in accordance with the estimates of revenue and expenditure and the fiscal framework, excluding statutory expenditure,
debt service cost and the contingency allowance.

She advised the Committee to consider the recommendations of the Financial and Fiscal Commission (FFC), the reports on actual expenditure published by the National Treasury, and to consult with any other Committee in considering matters referred to it. She emphasised how helpful the reports published by National Treasury were, since they identified under-spending and over-spending at a very low level.  Similarly, if the Committee wanted to recommend any amendments to the budget, it would have to demonstrate how the amendments took into account the broad strategic priorities and allocations of the relevant budget; the implications of each proposed amendment for an affected vote and the main divisions within that vote; the impact of any proposed amendment on the balance between the transfer payments, capital and recurrent spending in an affected vote, and set out the impact of any proposed amendment on service delivery.

Referring to what the Committee had to assess, she said that the Committee would have to assess responsiveness -- whether expenditure responded to the needs or not. It would also have to assess efficiency, for which the input-output ratio was the most basic means of measurement. For
example, education spending (input) affected educational attainment rates (output).The Committee would also assess effectiveness -- what impact it made, and it would assess whether the actual expenditure was economical, where supply was a good way of determining value for money. 

The public benefit organization (PBO) was highlighted as a means through which the Committee could determine efficiency, effectiveness and economy. It could help the Committee to analyse the quarterly economic brief, conduct a policy analysis which focused on the monitoring of the implementation of the National Development Plan (NDP), and to forecast audits by way of the Medium Term Budget Policy Statement. She asserted that the PBO considerations and analysis required fiscal consolidation and efficiency measures, the effectiveness of efficiency measure, strategic direction -- state of the nation address (SONA), policy expenditure priorities, a shift in expenditure per function and better economic performance, since the budget depended on the economy to generate the resources to finance these investments.

South Africa needed fundamental changes in its structure, systems, institutions and management.  As a result, she suggested that efficiency measures could be implemented in the areas of consultants or professional services, travel and accommodation, catering, social events, entertainment allowances, communication and advertising, the hiring of venues and the size of delegations to events.

During the national adjustment process, an amount of R1.308bn had been declared unspent, of which R243.3 million was from compensation of employees, while R317.8 million shifted from compensation of employees and the reallocation of savings due to cost containment measures had also been a factor. The Executive, National Treasury and Parliament were listed as approval mechanisms for the various adjustments.  Government could indeed have a more structured approach in sector-specific measures, communication of efficiencies and in spending reviews.  

In order to display the functional changes since the 2016 MTBPS, she referred to the variations in the total allocated consolidated expenditure, which showed a decline of R6 272 million in 2016/2017;  R864 million in 2017/2018; R1 052 million in 2018/2019 and R4 907 million in 2019/2020. She added that since the 2016 MTBPS, economic changes had resulted in a drop in the compensation of employees by R2 782 million in 2016/2017, and a rise in goods and services payments by R3 727 million. It had also resulted in a drop in payments for capital assets of R8 105 million.

Measures addressing fiscal risks

Fiscal risks such as the wage bill could reduce appointments in non-critical positions, to stabilize headcounts. Another fiscal risk, inefficiencies in expenditure, could be reduced by way of improving budget execution, improved in-year monitoring and introducing procurement reforms. Financially troubled public entities could be addressed by way of budgeting neutral assistance by National
Treasury.

Fiscal implications of sovereign credit rating downgrade

The direct effects of the sovereign credit downgrade included: the interest paid on future government debt issued would increase; less money would be available for government’s policy priorities; it created a vicious cycle of higher debt and further downgrades, and key South African financial institutions were also downgraded. Indirect effects included: damaging investor sentiments that resulted in slower growth and lower tax revenues; forced selling of government bonds and further rand depreciation; higher inflation, as government spending had to grow faster to compensate, and higher short-term interest rates, which would result in slower growth and lower tax revenues.

National Development Plan

The National Development Plan (NDP) proposed the incorporation of its proposals into the existing activities of departments, broken down into the short and medium-term plans of government at the national, provincial and municipal level. The medium term strategic framework (MTSF) was a detailed five-year implementation plan structured around the 14 (NDP) priority outcomes. It was the mechanism through which all plans of government institutions should align in order to ensure policy coherence, alignment and coordination across government plans and budgets.

The Cabinet used the (MTSF) to monitor the implementation of the NDP across the government through the Programme of Action (POA) report. Furthermore, the POA should enable Parliament, provincial legislatures and the public to monitor the overall impact of implementing the MTSF in society. The Speaker requested the Parliamentary Budget Office (PBO) to provide an update on the status of the NDP. This was what had been done in response:

• an analysis of the performance on the achievement of the MTSF targets for the 2014/15 and 2015/16 financial years;
• an assessment of the alignment of the 2014-2019 MTSF of government with the actions and objectives of the NDP, including technical analysis;
• an assessment of the reporting systems for performance, monitoring and evaluation;
• an assessment of the budget allocations that contribute to the implementation of the NDP;
• an assessment of the alignment of the composition of the management structures of the 14 outcomes with the budget function groups was reviewed.

Outcomes achieved per outcome 2015/2016

A number of the outcomes appeared to have been reached as per their targets in theory, but in practice and in light of the NDP, targets were being lowered instead of being met. For quality basic education, a target of 25% had been achieved. A target of 42% was attained for outcome 2. Outcome 3 was 25% achieved. A percentage of 34% was achieved for outcome 4. For outcome 5, 38% of the target was achieved. Outcome 6 was achieved a percentage of 18%. Outcome 7 had a 49% achievement. These figures were not true indication of what had been occurring in departments such as Basic Education. Much more had to be done for the NDP to indeed be implemented at various levels of society.

Discussion

Mr Shaik Emam said that budget votes were going to be debated by the Committee, and in his opinion, the Committee should spend a week or two interrogating all the budget votes, because if the Committee was going to be supporting these budget votes, it needed to fully understand what it was dealing with and be able to see what the departments had achieved as targets, and what had not been achieved, before approving them. In future the Committee needed to allocate a week or two to be able to interrogate the budget reports, and play a greater role in the entire budgetary process and bring in the important departments to engage with them. This would assist the Committee in influencing adequate funding for deserving departments and ensure that the Committee was not misled.

The Chairperson concurred with Mr Shaik Emam on his proposal, and suggested that perhaps the Committee would need to collaborate with the Auditor-General, because it looked at the departments’ annual performance plans when undertaking its audits.

Ms C Shope-Sithole (ANC) said that there was no country in the world without political uncertainty, and she did not believe that the downgrade of this country was the result of political uncertainty. She believed that the ratings agencies were the most corrupt organisations, and had played a role in the 2008 financial crisis, so they cold not be trusted. Government and its agencies needed to focus more on bringing in more investors to the country to re-shape the economic climate. She commented that it was a quite strange that countries like the US and other developed countries did not get rated.

Dr Figg agreed with Ms Shope-Sithole, and added that the departments should not be provided with the scope of what the meetings would cover when they were being called in, because there was a tendency to mislead Parliament. The Committee should rather work closely with the PBO and the Auditor-General to get all the information it required so that it could be better informed, without any bias, to interrogate the departments.

An official responded that the leading departments should not get information from the contributing departments, due to false reflections of their performance. There were many other external factors that contributed to the bad performance that the Committee was being informed about. The PBO had started looking at the departments’ APPs, and had been looking at the indicators in the MTSF. It had tried to find those indicators in the APPs, but they were not there. In Basic Education, only 25% of the indicators were found in the APP that were in the MTSF, and this meant that there was no way that the APP could be implemented if there was no alignment. In terms of reporting quarterly, there was always a misalignment between expenditure and performance. 

Mr McLoughlin said the Committee receiveds all this feedback and information from the PBO and came up with the same resolutions each year, but nothing actually got done. As the Standing Committee on Appropriations, the information should be utilised by the Committee to influence Treasury’s decisions on appropriations for departments. The results were not being achieved with the money being spent by the departments. Furthermore, it was not necessarily political uncertainty that may have influenced the ratings downgrade, but the perception of political uncertainty.

Mr Shaik Emam said the question that must now had to be asked was how was the Committee going to ensure that all the right and corrective measures were going to be implemented.

The Chairperson said that the Committee was in the process of doing this, and slowly but surely it was in the process of moving away from the narrative and addressing the core business, and ensuring the core business was aligned to the NDP, the budget and the Nine Point Plan.

The meeting was adjourned.