CORRUPTION WATCH REPORT
Public procurement deviations and contract expansions ‘really worrying’ – law expert
Corruption Watch recently released its Procurement Risk Trends report, which found a material increase in the number of reported deviations and that the total value of contract expansions for the 2022/23 financial year exceeded R157bn.
Corruption Watch (CW), working with procurement law expert Professor Geo Quinot of Stellenbosch University, recently released its Procurement Risk Trends 2023 report, which focuses on trends in public procurement deviations and contract expansions.
The data in the 2023 edition are sourced from reports submitted to National Treasury by all procuring organs of state, as well as the analysis made possible by CW’s online tool, Procurement Watch, which aggregates data from these individually published reports.
During a webinar on Wednesday, Quinot unpacked some of the findings from the report. Public entities are allowed to deviate from procurement procedures set under limited circumstances and an entity deviating from the prescribed procedures does not in itself mean something is wrong with the procurement, Quinot said.
The most significant observation regarding the deviation data from the 2022/23 financial year was the material increase in the number of reported deviations. The data show a massive increase of 247% from 2021 to 2022/23, representing a cause for serious concern when set against the backdrop of generally decreasing deviation numbers since 2017.
“That in itself is a red flag and one must ask questions about this, and this calls for interrogation to see whether there are good reasons for more deviations being noted or whether there is some abuse going on there,” Quinot said.
A large number of these deviations were being reported by the research cluster of South Africa’s public entities like the CSIR, which is not a cause for concern for Quinot, but illustrates the need for alternative procurement methods.
“In almost all of those cases, the acquisitions are so specific, relating to very specific research equipment or research needs, that it would really not be sensible to go out in any other kind of form of procurement,” he said.
“I think those cases which do account for a very large part of these 1,892 deviations [in the 2022/23 financial year], they tell us quite clearly, that the public procurement system we’ve got for those entities is not fit for purpose.”
There is also a high chance the increase in the deviation numbers may reflect increased reporting of deviations rather than an actual increase in deviations.
“I think what we now see is much higher levels of reporting, which in itself is, of course, good. So there is a significant increase in numbers but I would not be too alarmed yet about it,” he said.
The report also showed that while the number of reported deviations increased dramatically between 2021 and 2023, the value of deviations declined significantly. The total reported value of procurement via deviations in 2020/21 was around R34-billion, while in 2021/22 it went down to R28-billion. The figure declined further in the 2022/23 financial year to around R11.9-billion.
“We’ve had a massive increase in number, but a two-thirds decrease in value. So, it means that there is an increase in smaller value deviations, and that should give us some comfort,” Quinot said.
“It suggests that we probably need a different procurement method for these smaller value items, which then explains the high number but the low value.”
Organs of state top deviation list
Four of the top 10 deviations in 2022/2023 involved an organ of state as a supplier, including the top deviation of R2.5-billion for the Department of Communications and Digital Technologies with Broadband Infraco and Sentech as the suppliers.
The most common reasons for deviations during 2022/2023 were “emergency” and “sole provider”, which Quinot explained as perfectly valid and lawful reasons.
“Quite worrying reasons for deviations would be reasons like ‘poor planning’ or ‘preferred supplier’, which is quite a troubling reason for deviation because just because you have a preferred supplier, should not be a reason for deviating,” he said.
A low number of expansions reported
Expansions refer to when there is an existing contract and during the lifetime of that contract an entity expands it, said Quinot.
While reported expansions have steadily declined since 2017, the data for the 2022/23 financial year show a slowing down of the decline and a very slight increase in reported expansions. On current data, the number of reported expansions has seemingly stabilised since 2019 to between 650 and 700. If this reported data reflect actual practice, it’s a good sign, said Quinot.
“This is actually a very low number, it may sound like a lot, but when you take into account the thousands of contracts that are being procured and concluded through procurement across the entire state — this is actually a very low number,” he said.
Number of expansions vs value of expansion
Comparing the number of expansions with value will illustrate how much money is spent through an expansion as opposed to a fresh procurement.
“Our concern with an expansion is the fact that every rand that is spent via an expansion, is a rand that was not subjected to a competitive procurement process and that makes us worry a bit,” he said.
The total value of contract expansions in 2022/23 exceeded R157-billion. This was almost double the total reported value of expansions in 2021 even though the number of reported expansions in 2022/23 (673) was only slightly more than in 2021 (644). The implication is that the extent of expansions was much higher in 2022/23 than previously.
“That is worrying because if we put that in different terms, it means that on average those 673 contracts have all been doubled in value, it is a 97% expansion which is really worrying,” he said.
Read more in Daily Maverick: Flawed Public Procurement Bill risks State Capture 2.0
Quinot explained that there is a significant variance in the percentage increases through expansions between the 673 cases. These range from a 120,000% increase for an original contract value of R15,000 to R18-million, to another expansion with a 1% increase.
“When we average it, it is 97% across all those contracts, which is worrying because that means that there’s really something troubling going on there. Again, remember, we can’t just say that is abuse, it might just be really poor planning, but one should certainly go and look at what is going on,” he said.
The 10 largest contract expansions by value reported to the National Treasury in 2022/2023 were dominated by Eskom, which appeared on the list six times. Quinot said this was not surprising, given the energy crisis and one could argue that Eskom’s procurement at the moment is probably all in the category of emergency procurement.
The Department of Water and Sanitation (DWS) also featured on the list. The contract for security guarding services for the DWS for two months in Limpopo was originally valued at R534,743,288 and increased by 1,042% to R5,571,216,535. Quinot said this was a “massive variation” and the reason for the expansion was troubling.
“The Public Procurement Bill includes a provision that suggests that rules must be made for the vetting of all successful suppliers. We’ve got the factual evidence that that is a massive problem because the DWS indicated that the reason why they had to expand the existing contract by 1,042% was because the vetting of the new service providers had not been completed,” he said.
“That’s just one entity and if we duplicate that across the entire procurement sector, I think this is exactly what we’re going to see. So, I think this is empirical evidence suggesting that that particular proposal in the bill is a bad one and one should not really be excited about it.”
Mechanisms not being utilised to their full extent
Debarment is the mechanism used to restrict suppliers and is globally considered to be one of the most effective mechanisms to deal with the abuse of procurement, Quinot said.
South Africa utilises two different debarment mechanisms, the Register for Tender Defaulters and the Database of Restricted Suppliers, both of which are publicly available. The Register for Tender Defaulters is a database that lists suppliers and contractors found guilty of criminal offences, and no government entity may award a tender to a company or individual on the register.
“Now, the surprise is that this list is empty at the moment; there’s only ever been two entities since this thing came into existence. That in itself, I think, is reason for concern and something that one should continuously interrogate. Why is it that we are not seeing criminal prosecutions of bad suppliers, resulting in listing on this register?” Quinot asked.
The Database of Restricted Suppliers was not being utilised fully either.
“It is an administrative structure, so it means you end up on this list not using a court finding, but by way of a procuring entity identifying some wrongdoing, and then listing you on this central database,” he said.
Read more in Daily Maverick: Government lost R12bn to non-compliance and fraud, latest Auditor-General report reveals
Quinot noted that there was a low number of public entities (19) that had submitted names for this list, bearing in mind that there are around 40 national departments, 103 provincial departments, 278 municipalities, nine constitutional institutions and 154 other public entities listed in schedule 3 of the Public Finance Management Act.
“We really do not see this mechanism being used in any extensive way. What is most surprising is the near complete absence of national departments and provincial governments, and that must raise serious questions. It cannot be that we don’t have bad contractors in those entities,” he said.
Using the data going forward
Quinot concluded by stressing the importance of educating the public and presenting information in a way that enables conversations to happen.
Motlatsi Komote, a legal researcher at CW, echoed this, adding that there was a need for more budget and procurement advocacy.
“We need more education and knowledge around procurement spaces. We need to continue the conversations, and we need to make sure that whatever information we are putting out there is as easily accessible to members of the public so that they can engage and interrogate what is happening in the procurement space.” DM