EVALUATION OF SUPPLY CHAIN MANAGEMENT PRACTICES WITHIN THE

R200 000 THRESHOLD

10 March 2010

PRESENTATION TO THE PORTFOLIO COMMITTEE ON PUBLIC SERVICE AND

ADMINISTRATION

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OUTLINE OF THE PRESENTATION

INTRODUCTION

LEGISLATIVE FRAMEWORK

OVERVIEW OF FINDINGS IN RESPECT OF ALL TRANSACTIONS EVALUATED

RECOMMENDATIONS

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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.

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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.

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.

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TERMINOLOGY Transactions of departments were assessed in terms of compliance to each step of

the procurement process as follows:

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Procurement step Type 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 payment Examination of evidence of an invoice on file

corresponding to a payment advice or equivalent

document and other correspondence

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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

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%

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.

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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%

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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.

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%

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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.

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%

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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.

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%

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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

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THANK YOU!