1. EVALUATION OF SUPPLY CHAIN MANAGEMENT PRACTICES WITHIN THE R200 000 THRESHOLD 10 March 2010 PRESENTATION TO THE PORTFOLIO COMMITTEE ON PUBLIC SERVICE AND ADMINISTRATION

2. 2 OUTLINE OF THE PRESENTATION  INTRODUCTION  LEGISLATIVE FRAMEWORK  OVERVIEW OF FINDINGS IN RESPECT OF ALL TRANSACTIONS EVALUATED  RECOMMENDATIONS

3. 3 INTRODUCTION  In spite of comprehensive legislation and measures implemented by government to manage the risks of fraud and corruption in the procurement environment, incidents of financial mismanagement remain prevalent.  Many of the complaints that have been lodged with the Public Service Commission (PSC) in terms of the Complaints Rules pertain to allegations of irregularities, fraud and corruption within the supply chain management framework of government departments.  The PSC has also noted that transactions that fall within the R200 000 threshold (the point at which it is required that a bid or tender evaluation process is to be undertaken) are generally susceptible to abuse.  In view of the above, the PSC commissioned an Evaluation of Supply Chain Management Practices within the R200 000 threshold within the national and provincial departments of Public Works and Housing.

4. 4 LEGISLATIVE FRAMEWORK  Section 217(1) of the Constitution states that when an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost effective.  Section 38(1)(a)(iii) of the Public Finance Management Act (PFMA) states that the accounting officer for a department must ensure and maintain an appropriate procurement and provisioning system which is fair, equitable, transparent, competitive and cost effective.  Section 76(4)(c) of the PFMA provides for National Treasury to make regulations or issue instructions applicable to institutions for determining a framework for appropriate procurement and provisioning systems which are fair, equitable, transparent, competitive and cost effective.  Sections 2 of the PPPFA prescribes that an organ of state must determine its preferential procurement policy and implement it within a framework that sets out a preference point system relating to specific goals.  SCM Regulation 3 issued in terms of the PFMA, prescribes that the accounting officer or accounting authority of an institution must develop and implement an effective and efficient supply chain management system. Such a system must be fair, equitable, transparent, competitive and cost effective.

5. LEGISLATIVE FRAMEWORK (continued)  Practice Note Number SCM 2 of 2005 sets out the threshold values, detailed below, for the procurement of goods and services, hiring or letting of anything, acquiring or granting any right or disposing of movable state property, by way of price quotations or through the competitive bidding process. Up to a value of R2 000 (VAT included) Accounting officers/authorities may procure without inviting bids or quotations by means of petty cash. Above the value of R2 000 not exceeding R10 000 (VAT included) Accounting officers/authorities may procure by obtaining at least three verbal or written quotations from, where applicable, a list of prospective suppliers. Above the value of R10 000 not exceeding R200 000 (VAT included) Accounting officers/authorities should invite and accept written price quotations from as many suppliers as possible that are registered on the list of prospective suppliers or from other suppliers where no suitable suppliers are available on the supplier list. 5

6. TERMINOLOGY  Transactions of departments were assessed in terms of compliance to each step of the procurement process as follows: 6 Procurement stepType of analysis (a)Evidence of invitation of quotation Assessment of the availability of documentary evidence of invitation of quotations, either verbal or written (a)Evidence of appropriate quotations Appraisal of the number of quotations on file to test compliance with the number of quotations that were prescribed (a)Evidence of evaluation of quotations Review of available documentary evidence to verify that the appropriate quotation is accepted (a)Evidence of request for services/goods from service provider Analysis of evidence of an instruction, e.g. an order, to the service provider to provide goods/services (a)Evidence of paymentExamination of evidence of an invoice on file corresponding to a payment advice or equivalent document and other correspondence

7. 7 OVERVIEW OF FINDINGS IN RESPECT OF ALL TRANSACTIONS EVALUATED  The average rate of compliance to procurement rules relating to invitation of quotations is 71%. It is of concern to the PSC that only 5 provinces are above this average DepartmentEvidence of invitation of quotations Average rate of compliance National54%71% Eastern Cape83%71% Free State81%71% Gauteng58%71% KwaZulu-Natal65%71% Limpopo72%71% Mpumalanga97%71% North West87%71% Northern Cape64%71% Western Cape47%71%

8. OVERVIEW OF FINDINGS IN RESPECT OF ALL TRANSACTIONS EVALUATED (continued)  In terms of evidence of appropriate quotations being available, i.e. receipt of the required number of quotations or in the event of deviation from this, appropriate written authorisation being kept on file, a compliance rate of only 55% was identified. It is particularly alarming that at a National level and in 4 provinces,compliance in this area was below the 55% average. 8 DepartmentEvidence of appropriate quotations Average rate of compliance National40%55% Eastern Cape79%55% Free State65%55% Gauteng19%55% KwaZulu-Natal53%55% Limpopo62%55% Mpumalanga84%55% North West69%55% Northern Cape41%55% Western Cape42%55%

9. 9 OVERVIEW OF FINDINGS IN RESPECT OF ALL TRANSACTIONS EVALUATED (continued)  The average rate of compliance to procurement rules relating to the evaluation of quotations is 54%. This is also unacceptably low and it indicates that the application of the criteria for awarding of orders for goods/services is not well controlled and monitored and is therefore prone to abuse. DepartmentEvidence of evaluation of quotations Average rate of compliance National38%54% Eastern Cape72%54% Free State65%54% Gauteng19%54% KwaZulu-Natal49%54% Limpopo62%54% Mpumalanga80%54% North West72%54% Northern Cape45%54% Western Cape42%54%

10. 10 OVERVIEW OF FINDINGS IN RESPECT OF ALL TRANSACTIONS EVALUATED (continued)  Compliance to procurement rules relating to requests for goods/services from service providers is at an average of 69%. Failure to issue specific instructions and / or orders to service providers exposes the departments to, amongst other irregularities, the risk of incorrect deliveries and inferior quality of good/services. DepartmentEvidence of requests for goods/services from service providers Average rate of compliance National88%69% Eastern Cape91%69% Free State87%69% Gauteng71%69% KwaZulu-Natal24%69% Limpopo60%69% Mpumalanga50%69% North West93%69% Northern Cape56%69% Western Cape72%69%

11. 11 OVERVIEW OF FINDINGS IN RESPECT OF ALL TRANSACTIONS EVALUATED (continued)  Compliance with the due payments process is high with an average rate of compliance of 94%. This level of compliance indicates that due diligence is exercised over the payment process. This should continually be encouraged. DepartmentEvidence of paymentAverage rate of compliance National93%94% Eastern Cape85%94% Free State96%94% Gauteng98%94% KwaZulu-Natal98%94% Limpopo99%94% Mpumalanga92%94% North West90%94% Northern Cape94% Western Cape92%94%

12. 12 RECOMMENDATIONS  The PSC based on its findings is making the following recommendations to improve supply chain management: o Ongoing forensic or other specialised audits within the supply chain management process. o Regular fraud detection reviews. o Ensuring segregation of duties. o Ensuring adequate supervision of the procurement process. o Encouraging whistle-blowing on maladministration and corruption. o Issuing formal requests for quotations. o Recording deviations in the supply chain management process. o Payment of invoices should only be made on the basis of the original quotation, order form and invoice. o Maintaining an updated list of service providers. o Declaration of conflicts of interest. o Performance ratings of suppliers contracted to departments

13. 13 THANK YOU!