Challenges in Local Government Supply Chain Management

Supply Chain Management Challenges IMFO - Public Sector Finance Seminar 14 July 2015 Similo Mbongwe

CONTENT 1. Introduction 2. Legislation/Regulation 3. 13/14 Audit Outcomes 4. Lessons learnt 5. CPO s Observations 6. Recommendations 7. Conclusion

INTRODUCTION The little research done in Supply Chain Management (SCM) processes in local government suggests that there is a lack of internal control This has led to increased cases fraud and corruption in SCM processes Linked to the poor controls is inadequate monitoring and evaluation of SCM processes Hence some deviations or non-compliance issues have gone by undetected in the past However, the Auditor-General has highlighted a number of internal control deficiencies in most municipalities Accordingly, there has been a lot of improvement in terms of reducing irregular expenditure and improving controls, but more work still needs to be done

SCM OVERVIEW Constitution of SA Service Delivery (Human Settlements, infrastructure, basic services, etc) Systems Act , MFMA and its Regulations, BBBEEA, PPPFA Control Activities (SCM Policy, Procedures, processes, etc) Municipal IDP SCM forms a critical part of service delivery for municipalities and for Government as a whole 4

SCM OBJECTIVES Ensuring timeous delivery of goods and services at the right time, cost and quality in line with the requirements of Section 217 of the Constitution of South Africa (Fair, equitable, transparent, competitive and cost-effective) KEY SCM RISKS Fraud & Corruption; Delivery of inferior goods or rendering of services of poor standards; Late/no delivery/rendering of goods or services; and Inflated costs.

INTERNAL CONTROLS INTERNAL CONTROLS OVERVIEW Components Control environment Risk Assessment (CSA & Operational) Information and communication Control activities (Policies and procedures) Monitoring (IA s and EA s) Responsibilities Council - Policy Management Implementation of policies Auditors (Internal & External) Assurance Providers 2nd and 3rd line.

LEGISLATION/REGULATIONS South African Constitution, S217; Municipal Finance Management Act, S111, S112, S116, S168, S32, S170 etc; Preferential Procurement Policy Framework Act; Municipal Systems Act, Code of conduct; Broad Based Black Economic Empowerment Act; MFMA Supply Chain Management Regulations, Reg 32, 36, 38, 41, 42, 44 and 45. The best supply chains aren t just fast and cost effective. They are also agile and adaptable, and they ensure that all their companies interests stay aligned Hau L Lee

2012/2013 AUDIT OUTCOMES

13/14 AUDIT OUTCOMES IRREGULAR EXPENDITURE IN BILLIONS 14 12,228 12 11.473 10 9.323 8 6.768 6 4 2 0 2010/2011 2011/2012 2012/2013 2013/2014 In 2013/2014, irregular expenditure for municipalities amounted to 11.473 billion when compared to R12.228 billion in 2012/2013 81% of municipalities incurred irregular expenditure (Metros and Districts included) Major contributing factor to irregular expenditure is Non-compliance with SCM Legislation and Regulations

IRREGULAR EXPENDITURE 58% (R6,598 billion) of the irregular expenditure transactions audited, revealed that goods and services were received Non compliance issues included: - 39% (R4.397 billion) Competitive procurement processes not followed - 53% (R5.981 billion) Non compliance with procurement process requirements - 9% (R972 million) Contract management issues Recurring transgressions indicate that inadequate measures have been taken by municipalities to prevent irregular expenditure There was Limitation of Scope on 73 Auditees in 2013/14 amounting R1.3 billion who could not produce evidence of SCM processes followed. In 2012/13 it was 98 Auditees with an amount of R2.8 billion

AWARDS TO EMPLOYEES, COUNCILLORS, STATE OFFICIALS 72 auditees awarded work to employees and councilors worth R 60 million 221 auditees awarded work to State Officials worth R 3.731 billion 47 auditees where councilors and officials failed to declare their interest in transactions worth R 31 million 181 auditees failed to obtain declaration from suppliers/contractors for transactions worth R 3.526 billion Operation excellence remains a greater imperative than most companies and most executives acknowledge Gene Tyndall, Supercharging Supply Chains

AWARDS TO CLOSE FAMILY MEMBERS 100 municipalities awarded work to close family members of employees and councilors to the value of R 781 million 31% of these municipalities failed to declare these awards in their Annual Financial Statements as required by SCM Reg 45

UNCOMPETITIVE PROCUREMENT PROCESS 58% of municipalities had material findings Common findings: - Three written quotations not invited for contracts under R200 000 and deviation not approved (45% of municipalities) - Suppliers did not have their tax affairs in order (25% of municipalities) - Competitive bids not invited for contracts over R200 000 and deviation not approved (21% of municipalities) - Preference points system not applied (15% of municipalities) - Declarations of interest not submitted (7% of municipalities)

INADEQUATE CONTRACT MANAGEMENT 34% of municipalities had material findings Common findings: - Performance of contractors not monitored on a monthly basis (13% of municipalities) - No or inadequate contract performance measures and monitoring (14% of municipalities) - Contracts amended of extended with approval (10% of municipalities)

INTERNAL CONTROL DEFICIENCIES 66% municipalities had inadequate controls Common findings: - Inadequate controls to ensure interests were declared (21% of municipalities) - No plan for addressing audit findings on SCM (16% of municipalities) - No or inadequate record keeping (15% of municipalities) - SCM officials not adequately trained (14% of municipalities) - No or inadequate actions taken to address SCM risks (11% of municipalities)

CHIEF PROCUREMENT OFFICER Chief Procurement Officer has raised the following issues: Are we getting value for money on our procurement activities? Are we optimizing the use of national tenders (transversal contracting system) for vehicles, medical supplies, computers, cellphones, plant & equipment rentals, uniforms, etc? Are we standardizing design, contracting models, and SCM documentation with regard to housing, IRPTN, etc? Are our procurement officials fully competent specialists? Is the use of ICT and data management being optimized e- procurement solutions with a centralized database? What are we doing to improve efficiency and visibility across the value chain? Are we paying fair value for our commodities?

LESSONS FROM MUNICIPLAITIES WITH CLEAN AUDITS Commitment and single-minded intention of their leadership to lead and set the right tone Basic internal controls and systems are in place Implement and monitor action plans to remedy deficiencies highlighted in previous year s audit findings Produce reliable reports supported by documentary evidence Legislated duties being performed effectively Staff are fully trained on SCM Regulations Consequence management is in place Effective risk management process, internal audit and performance management

Recommendations to improve SCM Internal Controls weaknesses

SCM STRIVING FOR EXCELLENCE 6 ENABLERS OF EXCELLENCE Focused teams with clearly defined responsibility, authority & accountability for all Supply Chain Management activities Organization & Structure Best-in-class Supply Chain Management processes with standardised item/service codification and the application of management methodologies relevant to item or category characteristics. Supply Chain Processes Technology Use of best-in-class spend analysis, demand planning, inventory optimization, e-sourcing /e- procurement (Source2Pay), warehousing and measurement tools. 6 Enablers to Achieve SCM Excellence Strategic Sourcing & Warehouse Processes Right people in the right position, empowered and driven by accountability with a common and comprehensive understanding of the policies, processes and procedures. People Strategic Sourcing teams using category management and deconstructing price methodologies, transactional teams automated ordering & decision support tools and warehousing teams working within advanced warehouse management systems using inventory optimization tools. Educated key stakeholders. Learning / Skills Significant value resulting from lower supplier prices, risk minimisation, reliable supplier delivery and optimized inventory.

NON-COMPLIANCE WITH SCM REGULATIONS, POLICY & PROCESSES Improved SCM Oversight Council and its Committees (MPAC, F & P, etc) and newly established CPO in National Treasury; Alignment of SCM Structures to the requirements of SCM elements; Constant review and updating of SCM Policy in line with any changes in Legislation (if any); Adequate Training of SCM staff (including Bid Committee members and officials outside of SCM Unit) Development of Standard Operating procedures for Supply Chain Management processes with templates Sharing of good SCM practices amongst municipalities Implementation of ISO 9001 standards Effective monitoring of all Audit queries (to avoid recurring findings)

NON-COMPLIANCE WITH SCM REGULATIONS, POLICY & PROCESSES Introduction of an online Quotation Management System in order to eliminate human elements Implementation of effective controls Regulation 36 awards (centralizing the process to SCM Unit) Internal Audit Unit to render more advisory services when it comes to auditing of SCM Improved procedures for Demand & Contract Management Introduction of Pro-active Risk Management processes and embedding Risk Management processes on day to day SCM activities: Development of SCM checklists for transactions under R200k and over R200k Improved pre-screening processes using above mentioned checklist

NON-COMPLIANCE WITH SCM REGULATIONS, POLICY & PROCESSES Declaration of Conflict of Interest by contractors or service providers to be covered on both checklists; Register to be maintained for awards to close family members; Reporting of awards ito Regulation 45 to be reported to Council on a monthly basis; Financial System to be configured in such a manner that it is compulsory for a supplier registration number to be captured on the system; Considering requesting Internal Audit to conduct audits on all tenders above a certain value threshold before awards are made public or finalized SCM unit to conduct workshops with unit who encounter continuous SCM issues

NON-COMPLIANCE WITH SCM REGULATIONS, POLICY & PROCESSES If you cannot describe what you are doing as a process, you do not know what you are doing. W. Edwards Deming The best supply chains aren t just fast and cost effective. They are also agile and adaptable, and they ensure that all their companies interests stay aligned Hau L Lee All we are doing is looking at the time line from the moment the customer gives us the order to the point when we collect the cash. And we reduce that time line by removing non-value-added wastes. Taiichi Ohno, the father of the Toyota Production System

CONTRACT MANAGEMENT Developing effective procedures for Contract Management, incl: Clearly defining the role of SCM ito of awarding of contracts; Whose responsibility it is to monitor suppliers/contractors What information line departments are suppose to submit to SCM to indicate performance of suppliers/contractors Development of a Supplier or Contractor Performance Management Policy/procedures Centralizing Management of the Municipal Contract Register to SCM Unit Linking the Central Contract Register with municipal Accounting System with users having restricted functions on the contract register Only SCM officials with access to amend data on the register, other officials have viewing rights only

CONTRACT MANAGEMENT Monitoring of contracts on a monthly basis by SCM Unit liaising with relevant Heads of Departments Improved processes for Blacklisting: Appointment of officials with relevant skills in the Blacklisting Committee; Ensuring that the Committee is multi skilled (Legal, SCM, Risk Management & Finance, Engineers, etc) Development of SOP s for blacklisting; Blacklisting procedures circulated municipal wide List of Blacklisted entities publicized on the Municipal Intranet and used when awarding contracts Legal Unit to be involved in crafting of SLA s to protect the interests municipality

CONTRACT MANAGEMENT Consideration of ERP system in long-term Consideration of introducing Electronic filing system (Document Management System)

IRREGULAR EXPENDITURE Refine processes to identify and report on irregular expenditure (eg utilizing S71 report, monthly expenditure certificates, etc) Development of Standard Operating procedures for Supply Chain Management processes, updated whenever there are SCM Policy changes Ensuring that Municipal SCM Procedures differentiate between major and minor deviations Improved processes for Procurement Scheduling which also links with Contract Management Close Monitoring of Big Capital Projects which accounts for a huge percentage of Municipal Capex

IRREGULAR EXPENDITURE Proper Screening of reports for Irregular Expenditure by Internal Control, Internal Audit, CIIU & MPAC; Access to contract management system restricted to avoid variation orders Disciplinary action instituted against all perpetrators of any wrong doing SCM office to offer SCM training for non SCM officials to present salient features of the MSCMP and training can be used to discuss irregular expenditure issues for the departments Obtain clarity from National Treasury and Auditor-General on any issues and this helps to avoid qualification issues.

CONFLICT OF INTEREST Updated declarations of interest - annually Introduction of processes for Verification of supplier information against PERSAL data Establishment COI Task Team and register of awards ito SCM Reg 45 Disciplinary action taken in all cases were officials were found guilty after following requirement of S32 Blacklisting of conflicted entities

VALUE-FOR-MONEY Benchmarking of prices fair value Establishing a relationship with SABS for development of standards for normal commodities with no standards Using National/Provincial tenders Optimise the use of ICT E-procurement, Centralized Contract Register, Online QMS Reduce turnaround times for SCM process by eliminating inefficiencies in the process.

OTHER SCM Portal on the intranet Bid Committee decisions, SCM Report templates, SCM Circulars, etc Ensuring that all SCM Practitioners sign acknowledgment of receipt of the SCM Code of Delegations Develop relationship with Auditor-General, Audit Committee, Internal Audit and National Treasury SCM Office to assist with internal controls and monitoring and evaluation relating to the SCM function Training of non SCM Staff and councilors and ensuring that they all sign attendance registers. procurement 1024x768 300x225 Understanding Procurement: A 3 Level Model

OFFICE OF CHIEF PROCUREMENT OFFICER National Treasury has issued several circulars and practice notes around the issue of internal control and enhancing compliance and accountability National Treasury must issue guidelines in dealing with irregular expenditure and the process of regularisation/condoning process National Treasury to issue a guideline regarding the interpretation of Regulation 44 (Principal Shareholder issue) This Office can be off assistance to municipalities score some quick wins in turning around SCM process in municipalities "If you don't have time to do it right you must have time to do it over." Unknown

CONCLUSION We all have a role to play Nothing is impossible to achieve We are all Public servants, let us always remember what is our role .which is serve serve the Public It is now time to get BACK TO BASICS.

THE END 100 Awe-inspiring Photos I m tired of high policy. I want to focus on nuts and bolts Dave Freudenthal