19 November 2009
A. BACKGROUND
The interface between the Public Service and the
private sector is a necessary requirement for effective delivery of services but
comes with inherent risks. The extent of the financial transactions entered into
between the Public Service and the private sector opens possibilities of
collusion, fraud and bribery, and the areas of Supply Chain Management in the
Public Service is especially vulnerable in this regard. Despite the
comprehensive legislation and measures implemented by government to manage the
risks of fraud and corruption in SCM, incidents of financial mismanagement which
includes the SCM process remains prevalent in the Public Service. It is on the
basis of this that the Public Service Commission (PSC) investigated Supply Chain
Management Practices Within the R200 000 Threshold.
The investigation, which took place from September 2007 to October 2008 and
covered the period 1 April 2005 to 31 March 2007, focused on the national and
provincial departments of Public Works and Human Settlements due to the
nature of these departments’ operations, which involves a large degree of
outsourcing to service providers. The investigation was aimed at amongst others,
establishing whether government departments adhere to departmental procurement
policies within the threshold of R200 000; identifying areas of weaknesses in
supply chain management cycle that makes the procurement process susceptible to
fraud and corruption; and provide recommendations with regard to the curbing of
incidents of irregularities, fraud and corruption regarding procurement
processes
B. KEY FINDINGS
a. The PSC reviewed a total of 1679 transactions across the national and provincial departments of Public Works and Human Settlements collectively.
b. From the review, the PSC found that the average rate of compliance to the requirement that evidence of invitation of quotations to service providers must be recorded was 71%.
c. Only 55% of transactions had evidence that the required number of quotations was obtained or had authorization for deviation from the required number of quotations. Low levels of compliance were particularly evident in the Department of Human Settlements: National (40%), Gauteng (19%), KwaZulu-Natal (53%), Northern Cape (41%) and Western Cape (42%).
d. In 54% of the transactions evidence could be found that the quotations were evaluated and where the lowest quotation was not considered, motivation for such decisions was recorded.
e. The investigation also revealed that only 69% of all the transactions the PSC evaluated complied with the requirement that requests to service providers for the rendering of a specific service must be done in writing and recorded. The PSC is of the view that 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 goods/services. Thus, the PSC is of the view that in the absence of a specific instruction and/or order to a service provider, departments are limited in their ability to terminate appointments of service providers or to litigate in the event of a dispute.
f. A total of 94% of transactions evaluated complied with the requirements attached to the payment process. Payments were generally effected on original invoices, in line with the quoted amounts and were authorized by appropriate delegated authority. This level of compliance indicates that diligence is exercised over the payment process.
g. The weaknesses that the PSC found in compliance to the prescribed SCM processes indicate that the application of the SCM process requires extensive improvement. The weaknesses that the PSC identified make the SCM process susceptible to the following irregularities:· 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 in requests for quotations;
· 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;
· Cover quoting whereby an official of a department colludes with an external service provider to submit multiple quotations under different entity names. In such instances only one service provider submit quotations thereby ensuring that it (service provider) will receive the contract;
· Kickback schemes;
· Irregularly directing orders to a business entity in which a government official has a vested interest;
· False invoicing;
· Overpayment of service providers; and
· Unauthorised expenditure in violation of the PFMA.
C. RECOMMENDATIONS
Although the evaluation focused on the national and provincial departments of Public Works and Human Settlements, the PSC is of the view that constant vigilance is required in order to mitigate and manage the risk of fraud, corruption and other irregularities in the procurement process and therefore recommends the following for implementation by all departments:
a. Departments should continuously be supported by ongoing training, education and communication of the due SMS process in order to ensure integrity within the SCM process.
b. Audits of SCM process should be aimed at identifying weaknesses which contribute to fraud, corruption and other irregularities. Such audits should specifically address each step of the SCM process and not only be in the form of generic internal audits reviews which management is inclined to place limited priority on and in respect of which remedial action is in many instances delayed.|
c. Departments should ensure that the same officials should not be assigned the responsibility of requesting quotations, evaluating them and making recommendations on the appropriate entity to who an order should be placed. The PSC is of the view that 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.
d. 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 as per the Protected Disclosures Act, 2000.
e. To mitigate the fraud risks associated with requests for quotations (RFQ), such as irregularly favouring a service provider by providing incorrect information to competing service providers, the PSC recommends that the issuing of a formal written RFQ should be compulsory across all departments. In instances where less than the prescribed number of quotations has been obtained, deviations must be recorded in writing and authorized in terms of the delegations of authority.
f. 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.
g. Officials involved in supply chain management must declare all interests including actual, perceived or potential on a regular basis. Furthermore, they should sign confidentiality agreements not to disclose any information received during the procurement process.
CONCLUSION
Based on the findings of this evaluation the PSC 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 particular concern. Recordkeeping of
invitation of quotations, the number of quotations, deviations,
evaluation of quotations and communication to successful suppliers is
particularly weak. These shortcomings make the procurement process
highly susceptible to the risks of mal-administration, fraud and
corruption. The lack of proper record keeping also results in inadequate
audit trails. This contributes to the likelihood that the investigation
of allegations of irregularities in procurement may not be successful in
that the high number of control weaknesses identified will themselves
disguise evidence of actual mal-administration, fraud and corruption
thus making these hard to uncover. The PSC is confident that its
recommendations which attempt to address the weaknesses identified will
reduce the risks of mal-administration, fraud and corruption in the SCM
process.
ISSUED BY THE PUBLIC SERVICE COMMISSION
For enquiries, please contact:
Mr Humphrey Ramafoko
Director: Communication and Information Service
Tel: 012- 352 1196
Cell: 082 782 1730
Fax: 012- 325 8344
www.psc.gov.za