THE COMMON ERRORS IN PUBLIC SECTOR SUPPLY CHAIN MANAGEMENT PROCESSES LEADING TO IRREGULAR EXPENDITURE FROM A FORENSIC INVESTIGATIONS PERSPECTIVE.
The Auditor-General SA 2014/15 Report indicated a staggering figure of irregular expenditure amounting to R25.7-billion across the country’s national and provincial departments and public entities for the 2014/15 year. The report covers 468 auditees, which included 167 National and Provincial Departments and 301 public entities with a total budget of R1.1-trillion for the year under review. According to the said report, one of the leading contributors to this figure is the failure by the auditees to follow competitive or fair procurement processes. At least 31% of the auditees had material findings on supply chain management.
Having been engaged by a number of clients, particularly in the public service and state owned entities, we have been exposed to numerous issues that lead to entities and departments incurring irregular expenditure. From this experience and the exposition by the Auditor-General report cited above, this article seeks to highlight the most common errors in the procurement space leading to irregular expenditure being incurred. We cite real examples as case studies without mentioning the clients involved in order to assist many of our clients and affected public sector entities who are struggling with the perennial challenge of irregular expenditure.
It is important at this stage to emphasize that irregular expenditure does not necessarily mean that funds have been embezzled or fraud has been committed. In the broader definition of irregular expenditure provided by the Public Finance Management Act (PFMA), irregular expenditure would relate to any expenditure incurred in a manner that is not consistent with the PFMA, SCM policies or any applicable legislative, regulatory or policy frameworks, which could mean something as seemingly insignificant as failure to keep a record of a transaction which might lead to the expenditure incurred in relation thereto being classified as irregular expenditure.
THE SCM FRAMEWORK OVERVIEW
Generally, the procurement processes are regulated by Supply Chain Management policies of each department or entity underpinned by the provisions of the Public Finance Management Act (PFMA). The greatest challenge however has been the failure of the Departments or entities to adhere to their own policies. We list herein-below some of the common challenges:
The Common Errors
- Bid Specification Process
The procurement framework requires the Departments and Entities alike to ensure that there is an independent and objective bid specification process based on the business case for a particular procurement. At this stage, qualification and technical requirements must be determined up-front in order to eliminate any possible form of bias. However, we find that generally, Bid Specification Committees are not meticulous in describing the detailed specifications against which the Bidders are to be evaluated. Sometimes the specifications are a bit ambiguous thus not capable of providing any objective assessment criteria. This weakness leads to subjective and sometimes inconsistent evaluation of the Bids. It is important for each of the Evaluators to reach consensus on qualification and evaluation criteria in advance and where there are possible ambiguities, to clarify the criteria in a manner that will make scoring consistent.
In most instances, the Bid Evaluation Committees (BEC) tend to delegate their function to the SCM Unit to conduct pre-qualification assessment of the Bidders for things such as Tax Clearance Certificate, Municipal Accounts, TV Licences etc wherever these are applicable. However, the Bid Evaluation Committee sometimes fails to conduct its own verification with the result that the errors or omissions by the SCM Unit become the errors of the BEC and therefore affect the entire bid process negatively. It is pertinent for the BEC to do a verification of the pre-qualification criteria application in order to ensure that no Bidders are unfairly excluded or others unfairly advantaged.
- Bid Evaluation
A number of evaluation reports to which we have been exposed, simply show gross inconsistencies when it comes to evaluations. What is quite apparent in certain instances is that Bid Committees never discuss these huge variances and discrepancies in the evaluation scores. Part of the challenge, of course, is lack of clarity with regards the specifications and clear indices for evaluation. Bid Evaluation Committees must ensure consistency in their evaluation by ensuring that they stick to pre-determined evaluation criteria and where there is no logical evaluation criteria, the Bid Evaluation Committee should feel free to stop the evaluation and insist that the evaluation criteria is pre-determined but in line with the Bid Specifications. The other challenge at this stage is the temptation to introduce new evaluation elements which were not part of or could not be read into the pre-determined specification. In one large Tender we found that due to risks that were identified post the issuance of the Bid, the Accounting Officer proposed that more than one Bidder be engaged. However, in executing this arrangement, which and of itself would not have caused challenges had it been properly managed, created challenges because no objectively determinable criteria was agreed upon, consistent with the Bid Specifications, as to how the split in appointing more than one Bidder would be handled and/or evaluated.
- Bid Adjudication
More often than not, Bid Adjudication Committees (BAC) tend to “rubber stamp” BEC recommendations and in certain instances, miss some critical elements in the unfairness of the evaluation process. In other instances, you find a BAC that becomes overly zealous to a point where it changes the recommendations of the BEC. Generally, it is a requirement for the BAC to refer their report back to the BEC for its consideration where its conclusions differ from those of the BEC. We have come across instances where BEC recommendations are simply substituted for a different outcome without engaging the BEC so that it can, on its own, review its earlier decision. This area of the BAC substituting outcomes of the BEC then leads to irregular expenditure.
- Record Keeping
A number of irregular expenditure issues flow from entities’ failure to keep appropriate records for the Bidding Processes. It is imperative that records for the Bid are kept in line with the Records and Archives Act and that there is always a point of reference. This record must contain all records pertaining to, inter alia:
i. Duly approved business case for the procurement
ii. Minutes of the Bid Specification Committee
iii. Copy of the Advert (showing proof of flighting of the advert)
iv. Attendance Register for Compulsory Briefing (where applicable)
v. Bid Register for all Bids received, their Bids and Price Tender
vi. Pre-Qualification Evaluation Records
vii. Signed Declaration of Interests
viii. Bid Evaluation Committee Minutes and All Evaluation Scores/sheets
ix. Bid Adjudication Committee Minutes
x. Approval of the Award
This information must be preserved in a filing system that will enable Auditors to immediately pick it up for their analysis. The downside of this is that many entities have been marked down on irregular expenditure simply because there were no supporting documents for the Bids they awarded and not necessarily because there was any irregularity in the handling of the Bid itself. In these days of modern technology, record keeping should not be a challenge because records can be preserved electronically by scanning all documents onto your procurement system.
- Failure to Terminate Expired Contracts
Another contributor to irregular expenditure are contracts whose term comes to an end but because the Bid processes are either not pursued or pursued inefficiently, the contracts expire and the service provider is still retained without following a competitive process because they are rendering an essential service. This matter goes to the issue of poor planning but sometimes complications with regards the management of Bid Processes which lead to delays in finalizing the award thus going over the term of existing contracts. 4 | P a g e
It is always essential to put an advance planner that will guide timelines for instituting bid processes factoring the possible delays etc so that bid processes are initiated much earlier and awards made before the expiry of the contracts. A prevalent challenge in some institutions is to have “ever-green” contracts [with or without a retainer] which have some indefinite lifespan, a matter that should be discouraged at all costs.
- Managing Deviations
Sometimes the institution is forced to deviate from the prescribed policy due to certain compelling circumstances, such as emergency, no other suppliers (single-source suppliers) etc. In such circumstances, entities tend to fail to properly articulate a motivation for the deviation in order to justify same. For example, we have encountered a situation where a Bid process is shortened in terms of prescribed timelines because it is alleged that the matter is an emergency. However, the matter related to some training. When regard is had to a proper definition of an emergency, it became clear that the procurement of training would not fit this description because, as an example, business continuity would not be affected if this procurement did not take place. It is therefore important to ensure that deviations are properly motivated and in line with the basis for deviations as prescribed in your framework.
Irregular Expenditure Toolkit
- Develop clear, concise and defined specifications for the Tender/Bid which will be capable of evaluation
- Issue an advert with clear deliverables and terms of reference as well as scoring/evaluation criteria
- Pre-determine points and basis for awarding points to a particular scoring functional area
- Constitute your Committees correctly and in accordance with your internal SCM policy which policy should be aligned with the PFMA and relevant National Treasury Instructions.
- Ensure that pre-qualification process is undertaken with accuracy and justification based on the advertisement requirements
- Ensure consistent and unbiased evaluation of the Bids based on the pre-determined scoring matrix and where there are huge variances and inconsistencies, have a recorded basis for same.
- Where recommendations of the BEC are not accepted, provide a basis for rejection of those recommendations and direct BEC to review and revert with its conclusion
- Keep a paper trail throughout the process
- Ensure that all deviations are properly motivated and approved at the right levels and in accordance with the policy frameworks in place.