Our Reputation promise/mission

Transcription

1 FREE STATE Report of the Auditor-General of South Africa on a performance audit of the use of consultants at the Department of Health of the Free State Provincial Government JANUARY 2014

2

3 Performance audit An independent auditing process to evaluate the measures instituted by management to ensure that resources have been procured economically and are used efficiently and effectively.

4 Our Reputation promise/mission The Auditor-General of South Africa has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, it exists to strengthen our country s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence. By Authority 2 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

5 Table of contents FOREWORD 5 AUDIT SCOPE 10 Key audit FINDINGS 14 OVERVIEW 15 EXECUTIVE SUMMARY 17 Key findings 20 Comments received 20 Conclusion 21 RECOMMENDATIONS 23 REGULATORY FRAMEWORK 35 Supply chain management 36 Standard Chart of Accounts 36 Public Service Regulations 37 PERFORMANCE AUDITING 39 Mandate 40 Purpose of performance auditing 40 Advantages of performance auditing 40 Differences between performance auditing and other types of auditing 41 Performance audit process 42 Focus areas and key audit questions 42 DEPARTMENT of health 27 Performance audit report to the FREE STATE provincial legislature 3

6 4 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

7 FOREWORD 5

8 FOREWORD I am honoured to present the results of a performance audit on the use of consulting/ professional services, contractors and agency/outsourced services at the Department of Health of the Free State Provincial Government (the department). For the purpose of this report, the terms consulting/professional services, contractors and agency/outsourced services have been grouped under the general term consultants. The focus areas of this performance audit are applicable to all of these third parties. In our current environment, the partnership between the private and public sectors has become important in driving South Africa towards its development goals. To optimise the value of this partnership, this report identifies areas that need to be managed to get the best value for money. The termination of consultancy services in the public sector is not advocated. However, attention is drawn to those areas where value for money spent on consultancy services was not secured. Performance audits on the use of consultants by government were conducted in 1996 and The main findings of this audit mirror the findings of the two previous audits. A report on the use of consultants at selected national departments, which was tabled in Parliament on 24 January 2013, also paralleled those findings. The National Treasury and the Department of Public Service and Administration had issued various guidelines and regulations to improve the overall management and use of consultants. However, many weaknesses still exist. This performance audit report highlights instances of inadequate planning. Inadequate financial and performance management were also prevalent. These deficiencies adversely affected the economical, efficient and effective use of consultants. 6 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

9 Economy Constraints on internal appointment processes and high vacancy levels at the department sometimes led to the use of consultants. However, strategic planning for the use of consultants was not always done and the department did not have a strategy and policy on the use of consultants. The department did not always determine whether outsourcing was the most cost-effective option in comparison to creating internal capacity. Efficiency Contracts and payments were not always monitored and evaluated to ensure that work done by consultants met deliverables. Effectiveness In some instances, the deliverables were only partially achieved. The outcomes of this audit have been shared with the management of the department and the provincial executives. The department has made a number of commitments; key among these is the institution of immediate action to address the findings and recommendations identified in this report. Key aspects of this report have been integrated into our financial audits to ensure regular monitoring by the department. I wish to thank the staff of the Free State Department of Health for their assistance during the audit. Auditor-General of South Africa Pretoria January 2014 The above observations did not conform to the principles of economy, efficiency and effectiveness, as reflected on page 19 of this report. The weaknesses identified were caused largely by the lack of rigorous review processes to ensure that existing prescripts were followed. These, and issues of inadequate planning and financial and performance management, adversely affected the economical, efficient and effective use of consultants. The recurrence of these issues is cause for concern. In the to financial years, the Free State Provincial Government spent R3,61 billion on consultants; R881 million on consulting/professional services, R2,36 billion on contractors, and R376 million on agency/outsourced services. Of this amount, the Department of Health spent R1,22 billion on consultants (34% of the total provincial expenditure of R3,61 billion). The Free State Department of Health also received a qualified audit opinion for the and financial years, and a disclaimer audit opinion for the financial year. Performance audit report to the FREE STATE provincial legislature 7

10 8 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

11 AUDIT SCOPE KEY AUDIT FINDINGS OVERVIEW 9

12 AUDIT SCOPE The performance audit on the use of consultants was conducted at the Department of Health of the Free State Provincial Government, and covered nine contracts with an estimated value of R147 million. Free State Provincial Government s operational expenditure during to Contract values were estimated in some instances, as some contracts could not be provided to the performance auditing team by the Department of Health. The department was selected for audit, based on our assessment of possible weaknesses in the use of consultants as identified through other audits, as well as spending trends. The Free State Provincial Government incurred operational expenditure 1 of R42,75 billion during the to financial years. Of this amount, its total expenditure on goods and services was R9,76 billion. 42,75 9,76 3,61 Expenditure on consultants Expenditure on goods and services Operational expenditure Expenditure on consultants by the Free State Provincial Government amounted to R3,61 billion (8,4% of its operational expenditure and 36,9% of its expenditure on goods and services). R billion The total expenditure on consultants by the Department of Health amounted to R1,22 billion (34% of the total provincial expenditure of R3,61 billion on consultants) for the three-year period to Operational expenditure includes compensation of employees, goods and services, and interest and rent on land 10 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

13 Total expenditure on consultants by the Free State Provincial Government R million % 27% 63% 16% 74% 45% 14% 10% 10% Consulting/ professional services Contractors Agency/outsourced services Total expenditure on consultants at the Free State Department of Health R million Consulting/ professional services Contractors Agency/outsourced services Audits similar to this provincial audit were conducted nationally and at selected departments of all other provinces. The report of the audit at selected national departments was tabled in Parliament on 24 January For the purpose of this report, the Standard Chart of Accounts terminology of consulting/ professional services, contractors and agency/outsourced services have been grouped under the general term consultants. The Standard Chart of Accounts defines these terms as follows: Consulting/professional services:...specialist services and skills provided that are required for the achievement of a specific objective, with the aim of providing expert and professional advice on a time and material basis. It is unnecessary to maintain these skills in-house since they are required on a once-off or temporary basis Contractors:...required to provide services that are of a non-specialised nature that are not core business of the department Agency/outsourced services:...the relevant department ordinarily has the capacity and expertise to carry out these services, but for some reasons are not utilising their own staff Performance audit report to the FREE STATE provincial legislature 11

14 EXPENDITURE ON CONSULTANTS Below is an overview of the expenditure on consultants by the Free State Provincial Government for the to financial years. Total expenditure on consultants per department in the Free State Provincial Government for to Agriculture Education Health Provincial Treasury Public Works and Roads Sport, Arts and Culture Social Development 1,349 1,223 Community Safety and Transport O ce of the Premier Tourism, Environment and Ec MEDPAS Trading Account Local Government and Housing 146 Human Settlements R'million Government Garage 12 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

15 Below is an overview of the expenditure on consultants by the Free State Department of Health for the to financial years. Total expenditure on consultants at the Free State Department of Health % 24% R million % 32% 50% Consulting/ professional services Contractors Agency/outsourced services % 50 13% 18% 26% Performance audit report to the FREE STATE provincial legislature 13

16 KEY AUDIT FINDINGS The table below summarises the key audit findings at the Free State Department of Health as they relate to the aspects of economy, efficiency and effectiveness. Key findings ECONOMY EFFICIENCY EFFECTIVENESS Economy The economical acquisition of consultancyrelated resources includes a competitive procurement process for the appointment of consultants and the creation and maintenance of a permanent staff capacity where required Efficiency The efficient use of consultants requires the achievement of an optimal relationship between the outputs produced by consultants and the resources expended by departments to remunerate these consultants. The management of the process to achieve this relationship is also a key consideration Effectiveness The use of consultants is considered to be effective if the objectives that informed the appointment of consultants are met Key findings at the Free State Department of Health in this regard include the following: Strategic planning for the use of consultants was not always done and the department did not have a strategy and policy on the use of consultants The department did not always determine whether outsourcing was the most cost-effective option in comparison to creating internal capacity Constraints on internal appointment processes and high vacancy levels were experienced, which sometimes led to the department appointing consultants to support the continuity of service delivery Key findings at the Free State Department of Health in this regard include the following: Contracts and payments were not always monitored and evaluated to ensure that work done by consultants, and the deliverables, met the project requirements Compliance with service level agreements was not always monitored The effective use of consultants at the Free State Department of Health was adversely affected by the following: In some instances, the deliverables were only partially achieved 14 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

17 OVERVIEW The Free State public sector cannot easily dispense with partnering with the private sector due to the specialised nature of some activities. In addition, departments experienced numerous human resource and other challenges. These challenges are recognised by the Free State Provincial Government and, in many instances, necessitate the use of consultants. When used correctly, consultants can be beneficial and provide access to skills that are not cost-effective for a department to build or maintain itself. While recognising the above benefits, it is necessary to remain mindful of the manner in which consultants are used by the provincial government. Section 195 of the Constitution of the Republic of South Africa of 1996 notes that the efficient, economic and effective use of resources must be promoted. The Public Service Commission, in its 2001 Report on the State of the Public Service, highlighted the use of consultants as a concern. In the report, the Commission stated: In 2001, the Department of Public Service and Administration instructed departments to: Undertake an institutional assessment of capacity to absorb outside assistance before tenders are issued Prepare sound and realistic tender specifications, which match the ability to implement and sustain the outcomes of projects Include skills transfer in the contracts and monitor the delivery thereof Undertake regular performance audits of consulting assignments Assess the total cost of using consultants in relation to cost-effectiveness before a decision is made to appoint a consultant Include information on the use of consultants in the annual report of a department to: Provide a more balanced view of personnel expenditure in the public service The Public Service Commission is of the view that the use of any consultant needs to be justifiable and open to intense scrutiny. This is particularly true when specialist, high cost professional services are utilised or when former state employees are involved. Provide information regarding expenditure on consultants, and the type and value of projects Improve the monitoring of government on the use of consultants Promote the sharing of learning products in government. The lack of skilled staff to carry out departmental duties has been highlighted in several recent reports of the Auditor-General of South Africa Performance audit report to the FREE STATE provincial legislature 15

18 The Department of Public Service and Administration also indicated that a database of reports produced by consultants would be compiled and updated annually, envisaging that it would contribute to: The reduction of the number of consultants appointed by different departments to develop virtually the same policies or systems Guidance in support of decision-making on the future use of consultants Sharing of learning products in the public service. Where consultants are the preferred option to deliver a service or programme, the department s capacity to monitor and evaluate projects must be strengthened. This will ensure that all project deliverables and related objectives are achieved. In instances where deficiencies are detected, corrective action must be imposed promptly. About this report This report is presented in an environment where the partnership between the private and public sectors has become important in driving South Africa towards its development goals. Consultants provide specialist services to the public sector. However, this performance audit also revealed that consultants have been appointed to provide core departmental functions. These include the provision of nurses in hospitals, for which the department should have internal staff. Since these skills were not available internally or the department was not successful in recruiting suitable staff, it had to rely on consultants to perform these functions. These, and issues of inadequate planning and financial and performance management, adversely affected the economical, efficient and effective use of consultants. The National Treasury and the Department of Public Service and Administration had issued various guidelines and regulations to improve the overall management and use of consultants. However despite these, many weaknesses still exist. The reasons for this include a lack of monitoring and enforcement of compliance. Appropriate action is also not taken against those who contravene existing laws, regulations and policies. 16 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

19 EXECUTIVE SUMMARY 17

20 EXECUTIVE SUMMARY Attention to the following focus areas is crucial in ensuring the economical, efficient and effective use of consultants by departments. This performance audit centred on the focus areas presented below: Planning and appointment processes Closing and finalising projects Extension of contracts Audit focus areas Performance management and monitoring of consultants Internal capacity at departments Training and transfer of skills from consultants to employees 18 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

21 SUMMARISED AUDIT OUTCOMES CLASSIFICATION FOCUS AREAS WHERE DEFICIENCIES WERE IDENTIFIED DURING THE AUDIT E AFFECTED NO. PROJECT BEST AVAILABLE VALUE OF contract 2 R CONSULTING/ PROFESSIONAL SERVICES CONTRActors AGENCY/OUTSOURCED SERVICES PLANNING AND APPOINTMENT INTERNAL CAPAcity TRAINING AND TRANSFER OF SKILLS PERFORMANCE MANAGEMENT AND monitoring EXTENSIONS OF contracts CLOSING AND FINALISING PROJECTS ECONOMY EFFICIENCY EFFECTIVENESS 1.1 Nursing services tender (page 29) P P P P P P 1.2 Appointment of nursing agencies on a quotation basis (page 30) P P P P P 2 Debt collection services (page 30) 3 P P P P P P P P 3.1 Waste management service (service provider A) (page 32) P P P 3.2 Waste management service (service provider B) (page 32) P P P P P P 3.3 Waste management service (service provider C) (page 32) P P P P P P Information technology, hardware 4 maintenance and software support P P P P P P P (page 33) Training of pharmacist assistants P P P 6 Financial and management advisory P Total The best available value is the contract value plus extensions. Where the contract value was not available, the actual payments were used 3 The consultants retained a certain percentage of the debt recovered as payment. This amount is estimated at R Findings are not material and therefore not included in the report 5 Most information requested for this project could not be provided by the department, resulting in a limitation of scope Performance audit report to the FREE STATE provincial legislature 19

22 KEY FINDINGS Contracts and payments were not ECONOMY Strategic planning for the use of consultants was not always done. The department did not have a comprehensive strategy and policy governing the use of consultants. This contributed to the increase in the department s expenditure on Planning and appointment processes EFFICIENCY EFFECTIVENESS always monitored and evaluated to ensure that work done by consultants met the deliverables. Compliance with service level agreements was not always monitored. In some instances, the deliverables were only partially achieved. Performance management and monitoring of consultants consultants. ECONOMY ECONOMY The department did not always determine whether outsourcing was the most cost-effective option in comparison to creating internal capacity. Constraints on internal appointment processes and high vacancy rates sometimes led to the appointment of consultants. Consultants sometimes performed essential functions such as nursing services. Internal capacity at the department The department did not effectively maintain its archiving system to ensure that all documents were safely stored and retained. Not providing information to the Auditor-General of South Africa for audit purposes is a contravention of the Public Finance Management Act. COMMENTS RECEIVED Limitation of scope The following feedback was obtained from the Free State Department of Health relating to the implementation of measures based on our recommendations. These corrective actions are monitored during the Auditor-General of South Africa s annual financial audits. Policy on appointing consultants The department has drafted a policy on consultants to address the gaps and challenges. The department will continue to use the services of the consultants if: the necessary skills and resources to perform projects/studies are not available 20 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

23 the accounting officer cannot reasonably be expected to train or recruit people in the time available. Policy on nursing agencies Consultants performance is monitored and managed to ensure that deliverables are achieved on time. The department will introduce a Nursing Agency Policy to tighten its internal control systems, processes and procedures. Policy on supply chain management The department has reviewed its Supply Chain Management Policy. In ensuring compliance, the supply chain management directorate has created the contract and compliance unit and the performance management unit. The performance of consultants is monitored through monthly reports to ensure adherence to the terms of reference and/or specifications. Performance is monitored continuously to enable timely corrections where applicable. Contracts are terminated where corrective measures applied are not successful. CONCLUSION Government s success in optimising the value and the benefits of using consultancy services will only be achieved if: Proper systems of financial management and controls are established and adhered to in the department Officials and accounting officers are held responsible for the economical, efficient and effective use of resources Compliance with regulations and policies is enforced Planning for the use of consultants is improved and is part of the department s strategy and business plans Sufficient internal capacity is created to enable departments to deliver on their mandates Performance audit report to the FREE STATE provincial legislature 21

24 22 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

25 RECOMMENDATIONS 23

26 RECOMMENDATIONS 1. Planning and appointment 1.1 The types and extent of services to be contracted out should be strategically considered, taking into account the following: The long-term objectives and needs of the department The costs of contracting out versus the cost of creating and filling internal capacity. 1.2 A comprehensive strategy and policy governing the use of consultants should be developed and implemented. 2. Internal capacity Internal capacity should be assessed regularly. Management should have a plan and prioritise filling the vacant posts on time, to reduce the reliance on consultants. 3. Training and transfer of skills Where training and transfer of skills form part of the project, the department should ensure that the consultant honours its contractual obligations in full. 4. Performance monitoring and management Consultants work should be monitored properly to verify their performance. This includes monitoring payments against actual services rendered. 5. Extension of contracts The extension of contracts and contract periods should be carefully considered, taking into account the original deliverables and future cost implications. 6. Closing and finalising consultancy projects 6.1 A retrospective analysis to determine whether the proper processes were followed and whether the desired objectives were achieved, should be done at the end of each stage and project. 6.2 A proper handover from the consultant to the department should be enforced at the end of the consultancy period. 7. Limitation of scope The department should address the lack of proper filing and archiving systems. This will ensure that documentation and information are readily available to support transactions and management decisions. 8. General 8.1 The Provincial Treasury should monitor compliance with relevant prescripts. In addition, it should enforce appropriate action where departments deviate from such prescripts. 24 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

27 8.2 The department s strategic and business plans should include the planned use of consultancy services. These plans should be intensively reviewed by internal audit and portfolio/audit committees. 8.3 The accounting officer s section in the annual report should cover the element of accountability for the use of consultants. This should focus on the extent to which economy, efficiency and effectiveness have been achieved in appointing consultants. 8.4 Specific oversight on the use of consultants should be performed quarterly by the relevant committees, including portfolio committees and the Provincial Public Accounts Committee. 8.5 Internal audit should include the use of consultants by the department in their annual internal audit plan, and perform regular audits in these areas. Performance audit report to the FREE STATE provincial legislature 25

28 26 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

29 DEPARTMENT of health 27

30 Department of health Total expenditure on consultants ( to ) R1,22 billion A. LIMITATION OF SCOPE Number of contracts audited 9 Value of contracts audited 6 R147 million Average vacancy rate ( to ) 40% Graph 1 provides a breakdown of the expenditure on consultants per category and per financial year. Graph 1: Expenditure on consultants at the Free State Department of Health % 39% 13% 50% 32% 18% 24% 50% 26% Consulting/ professional services Contractors Agency/outsourced services 6 The value of the contracts audited includes payments outside the to periods Information and documentation on a contract to the value of R was requested several times from the department. This documentation was considered necessary to demonstrate that management measures were in place. However, the department could not submit this information for audit purposes. Not providing information to the Auditor-General of South Africa (AGSA) for audit purposes is a contravention of the Public Finance Management Act. The lack of documentation resulted in the audit procedures on this contract not being carried out. The matter of the outstanding information/documentation was escalated to the department at various levels. B. STRATEGY AND POLICY ON THE USE OF CONSULTANTS The department did not have a strategy and policy to govern the use of consultants. The expenditure on consultants was R344 million in the financial year, R456 million in the financial year, and R423 million in the financial year. The department s lack of strategic planning led to it not analysing the costeffectiveness of using consultants. As a result, consultants were appointed on an ad hoc basis and the long-term effects were not considered. In certain instances, consultants performed key functions as the department did not create internal capacity. 28 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

31 C. KEY FINDINGS PER PROJECT 1. NURSING SERVICES 1.1 Nursing services tender The department did not have sufficient permanent nursing staff with necessary skills and experience. Nursing services are regarded as an essential service. 7 The department identified a need to supplement existing nursing staff due to the vacancies shown in table 1. Four consultants were appointed to provide nursing services in The three-year budget for these contracts, from 10 April 2007 to 26 March 2010, was R10 million The department spent R99,6 million on the four consultants due to vacancies. It did not determine whether this R99,6 million spent on four consultants was a cost-effective solution over three years without determining and in the best interest of the the cost-effectiveness department. Table 1: Vacancy rates for nurses FINANCIAL YEARS PROFESSIONAL NURSES NURSING ASSISTANTS AVERAGE VACANCY RATE ,0% 56,6% 49,8% ,1% 56,5% 49,3% ,1% 56,5% 49,3% ,6% 11,1% 10,9% The department did not fill vacant positions because it did not have sufficient budget. The budget had been overspent by R235,8 million during the and financial years due to the occupation specific dispensation. 8 Requests to appoint permanent nurses in key positions were not approved by the head of department. Examples of requests denied include: Filling 29 posts classified as absolutely critical. This was in various units of a hospital Filling critical posts in the Cardiac section of a hospital The appointment of six professional nurses in the Neonatal Intensive Care Unit. Hospitals had no alternative but to use the services of the consultants on a full-time basis to cover life-essential services Nurses earned a secondary income as they were employed by both the department and consultants at the same time - a process known as moonlighting. This presented a risk of the department providing poor quality nursing services due to nurses fatigue and abuse. From a selection of 93 nurses employed by a consultant, 26 (28%) were also employees of the department. Eight of the 26 nurses worked at the same 28% of a sample of 93 nurses were moonlighting hospitals where they were also employed by the department. In terms of the Public Service Act, employees require approval to perform remunerative work outside their official duties. Only two of the 26 nurses (8%) had approval to perform such remunerative work. 7 An essential service refers to a service which, if interrupted, would endanger or inconvenience the life or health of people 8 The occupation specific dispensation was introduced to revise and align certain occupations salary structures in the public service to the market. Performance audit report to the FREE STATE provincial legislature 29

32 1.1.3 It could not be determined whether a consultant had rendered satisfactory services to the department. This was because the Payments of R93,8 million contract was not monitored daily and were made without the monthly reports on the nurses contract being monitored performance were not completed. The Department of Health Supply Chain Management (SCM) Circular No. 11 of 2007 requires nursing services contracts to be monitored daily for compliance. In addition, heads of institutions such as hospitals must submit monthly reports to the departments procurement and performance management directorate The bid evaluation committee did not in all instances ensure that valid tax clearance certificates were obtained and attached to quotations. Practice Note No SCM 2 of 2005 requires a tax clearance certificate for amounts in excess of R15 000, and the notice did not approve a deviation from this requirement The department did not verify the time worked by nurses before payments were made. Timesheets were not attached to 15 invoices with a total value of R The invoices were for nursing services rendered by a consultant at six hospitals. This increased the risk that the department could pay for work that was not rendered due to inefficiencies in monitoring processes. 1.2 Appointment of nursing agencies on a quotation basis The Free State Provincial Health SCM Notice No. 13 granted approval to all health institutions to deviate from National Treasury s Practice Note No SCM 2 of Where institutions needed private nursing services, three written quotations were to be obtained and the Preferential Procurement Policy Framework Act (PPPFA) was to be applied. The following deviations from this notice were identified: On five occasions, nursing services totalling R were procured without obtaining three written quotations. No reasons were provided for the deviation Nursing services were procured five times without obtaining three written quotations from the notice. As a result of not obtaining three quotations, it could not be established whether the consultant was appointed at the lowest possible cost and in the best interest of the institution The department did not consider awarding points for historically disadvantaged individuals for three contracts amounting to R This was a contravention of the PPPFA. 2. DEBT COLLECTION SERVICES Two consultants were appointed to provide debt collection services for various health institutions. The department expected to use these consultants to recover R58,2 million of outstanding debt for unpaid hospital accounts. The contracts with the consultants stipulated the following: Consultant A would receive a commission of: 5% of debt recovered within 30 days of being handed over 9 to the consultant 8% of debt recovered after the 30 days Consultant B would receive a commission of 10% of all debt recovered. 2.1 The department did not perform a comprehensive needs assessment relating to outsourcing the debt collection function to the consultants. As a result, it did not compare the cost of employing permanent officials to the cost of using consultants for debt collection services. 9 A handover is where the consultant is provided with a list of debtors to collect debt on behalf of the department 30 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

33 2.2 The department did not monitor the consultants performance. The actual debt handed over by the department to the The consultants recovered consultant was R58,2 million, of which only R1,6 million of the only R1,6 million (2,77%) was recovered. R58,2 million handed over Table 2: Summary of actual debt handed over and the collection rates Total debt handed over from December 2004 until January 2008 Total debt recovered from December 2004 until January 2008 Debt still outstanding from amount handed over Collection rate (debt recovered of the total debt handed over) Consultant A Consultant B Total R R R R R R R R R ,45% 5,44% 2,77% The department did not ensure that the consultants complied with their service level agreements (SLA) 10 in the following instances: A consultant failed to submit its fidelity insurance guarantee 11 as required. As a result, the department risked not being able to recover funds that had been misappropriated or embezzled Monthly progress reports reflecting the following were not submitted: Departmental debt handed over Withdrawn and closed debt Debt handed over to the attorneys Monthly progress reports were not submitted to the department 10 A service level agreement is negotiated between two parties and details the nature, quality, and scope of the service to be provided 11 The successful bidder provides the department with a bank guarantee for a specified amount to cover losses in the event of the consultant defaulting Balances outstanding to be traced Commission received Fraudulent cases. The non-submission of monthly reports led to the following: Accurate and complete records for individual debtor accounts were not maintained The status of a debt handed over to the consultants was not monitored (e.g. whether the debt was untraceable, irrecoverable, handed over to attorneys, etc.) The consultants performance was not assessed against the SLAs Instances of theft and embezzlement of payments from debtors by the consultants could not be identified. Despite the above, the department did not take timely action to enforce or cancel the contracts. The department also did not claim damages when the consultants did not furnish the required information. 2.3 The department did not ensure that Consultant A adhered to the terms of the SLA when closing the project. Consultant A was also not evaluated at the end of the contract period. As a result, the department was exposed to the following risks: Consultant A could continue collecting debt and not pay the money over to the department The department had no record of the outstanding debt from the amount handed over to consultant A The debt would lapse and become unrecoverable if all the following were true: It had been three years since the debtor had made payment In the three years, the debtor had not acknowledged the debt In the three years, the debtor had not been summoned for the debt. Performance audit report to the FREE STATE provincial legislature 31

34 3. WASTE MANAGEMENT SERVICES Contracts for healthcare waste management services were awarded to two consultants on 2 August The contracts were for a period of three years, from 1 September 2007 to 30 June 2010, with a budgeted expenditure of R29 million. Consultant A was awarded four districts and consultant B one district. Consultant A s contract was subsequently ceded to Consultant C on 11 July Consultant A ceased its waste management operation as its profitability had declined. The transfer of the contract was approved by the department on 31 July The department did not assess or evaluate consultant C s ability to execute the contract. Institutions within the department identified difficulties with consultant C s services from the inception of the transferred contract. The following is a summary of the difficulties experienced by these institutions: No red plastic bags for the collection of medical waste No containers for sharp objects for the entire month No bins for human tissue Containers provided by the service provider did not have the required bio-hazard messages Collection of waste was done once a week or not done at all Health care waste was not always removed Waste was not collected regularly due to the service provider s incinerator being out of order Waste areas became a breeding place for rodents Medical waste was illegally dumped Payments were not accurate as the service provider s weighing scale malfunctioned. These shortcomings were also identified and reported by the AGSA financial auditors in a management letter dated May Consultant C s services were not terminated, and penalties were not imposed for a period of 19 months. This was due to the Despite non-performance, department s inefficient management of the consultant continued its the contract. The contract with services for 19 months consultant C was only terminated on 28 February When the contract with consultant C was terminated, the department approved a deviation from normal bidding procedures to appoint consultant B instead. This allowed consultant B to expand its ongoing contract to the four districts serviced by consultant C. The department did not assess or evaluate consultant B s ability to service the backlog created by consultant C s inability to perform the service. The AGSA s management letter dated May 2010 reported that medical waste was not being removed by consultant B at various institutions after the increase in the scope of consultant B s contract. 3.3 Payments made to the consultants in amounted to R , although the budgeted expenditure for three years was R29 million. It could not be established what the payments for were and whether the amounts were spent economically. 32 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

35 4. INFORMATION TECHNOLOGY, HARDWARE MAINTENANCE AND SOFTWARE SUPPORT The Hospital Information System (HIS) was developed by an information technology (IT) consultant. This system stores clinical, financial and management information from laboratories, clinics, wards and managers within the different hospitals. The HIS was operational in certain hospitals in 1998 and at certain clinics from The IT consultant provided hardware maintenance and software support for the HIS. Total payments made to the IT consultant for the and financial years amounted to R The department did not perform a comprehensive needs assessment for hardware maintenance and software support. The cost of employing permanent officials was not compared to the cost of using IT consultants. 4.2 The IT sub-directorates had a combined vacancy rate of 23% for staff who were capable of software support. These posts were not filled during the and financial years due to a moratorium on the appointment of new staff. 4.3 The IT consultant s agreement at a certain hospital did not provide for the transfer of skills to hospital officials. The agreement only provided for basic support training to officials. 4.4 The department approved seven extensions of the IT consultant s contract between January 2005 and April The seven extensions totalled R , which is Seven extensions to a single contract totalled R9,2 million 286% of the original contract value of R These extensions were not subject to a competitive procurement process. As a result, it could not be determined whether the extensions were made at the lowest possible cost and in the best interest of the department. Performance audit report to the FREE STATE provincial legislature 33

36 34 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

37 REGULATORY FRAMEWORK 35

38 REGULATORY FRAMEWORK While the Constitution of the Republic of South Africa of 1996 makes provision for the procurement of services by the public sector, various laws, regulations and policies, documents and guidance material pertaining to consultants have been issued over the past 10 years. Among these are: Supply Chain Management: A Guide for Accounting Officers (February 2004) and National Treasury Practice Note Number SCM 3 of 2003 (December 2003), issued by the National Treasury Standard Chart of Accounts Toning Project Summary Report (21 December 2007), issued by the National Treasury Public Service Regulations (2001), issued by the Department of Public Service and Administration Guide on Hourly Fee Rates for Consultants (annual publication), issued by the Department of Public Service and Administration Use of Consultants in the Public Service (September 2001), issued by the Department of Public Service and Administration A guide to managing consultants (2001), issued by the Parliamentary Support Programme. SUPPLY CHAIN MANAGEMENT In Supply Chain Management: A Guide for Accounting Officers (Supply Chain Management Guide), February 2004, Chapter 5, and National Treasury Practice Note Number SCM 3 of 2003, December 2003 (Practice Note 3) the following are stated with regard to consultants: The term consultant includes, among others, consulting firms, engineering firms, construction managers, management firms, procurement agents, inspection agents, auditors, other multinational organisations, investment and merchant banks, universities, research agencies, government agencies, non-governmental organisations (NGOs) and individuals. Accounting officers may use these organisations as consultants to assist in a wide range of activities such as policy advice, accounting officer s reform management, engineering services, construction supervision, financial services, procurement services, social and environmental studies and identification, preparation and implementation of projects to complement accounting officers capabilities in these areas. Consultants should only be engaged when the necessary skills and/or resources to perform a project/duty/study are not available and the accounting officer cannot be reasonably expected either to train or to recruit people in the time available. The relationship between the accounting officer and the consultant should be one of purchaser/ provider and not employer/employee. The work undertaken by a consultant should be regulated by a contract. The accounting officer is, however, responsible for monitoring and evaluating contractor performance and outputs against project specifications and targets, and should take remedial action if performance is below standard. STANDARD CHART OF ACCOUNTS According to the Standard Chart of Accounts Toning Project Summary Report, consultants, contractors and agencies/outsourced services are categorised as consulting/professional services, contractors and agency/outsourced services. 36 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

39 Consulting/professional services refer to specialist services and skills provided that are required for the achievement of a specific objective, with the aim of providing expert and professional advice on a time and material basis. It is unnecessary to maintain these skills in-house, since they are required on a once-off or temporary basis. It further states that a consultant is a professional person appointed by the department to provide technical and specialist advice or to assist with the design and implementation of specific projects/ programmes. The legal status of this person can be an individual, a partnership or a corporation. Contractors are required to provide services that are of a non-specialised nature that are not core business of the department. It is normally not cost-effective to maintain these skills within the department. Agency/outsourced services refer to services where the relevant department ordinarily has the capacity and expertise to carry out these services, but for some reasons are not utilising their own staff. The reasons might include temporary incapacity or the outsourcing of services to save costs, for example cleaning, security and recruitment. PUBLIC SERVICE REGULATIONS In terms of the Public Service Regulation (PSR) J.3, Part III: Planning, Work Organisation and Reporting of Chapter 1 of the PSR, 2001, a consultant means: A natural or juristic person or a partnership who or which provides in terms of a specific contract on an ad hoc basis any of the following professional services to a department against remuneration received from any source: The rendering of expert advice The drafting of proposals for the execution of specific tasks The execution of specific tasks which is of a technical or intellectual nature, but excludes an employee of a department. Performance audit report to the FREE STATE provincial legislature 37

40 38 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

41 PERFORMANCE AUDITING 39

42 PERFORMANCE AUDITING MANDATE This performance audit was conducted in accordance with the mandate conferred by section 188(4) of the Constitution of the Republic of South Africa, 1996, read in conjunction with sections 5(3) and 20(3) of the Public Audit Act, While it is not within the Auditor-General s mandate to question policy, the Auditor-General does assess the effects of policy (in terms of the principles of economy, efficiency and effectiveness) and the overall management measures that lead to policy decisions. PURPOSE OF PERFORMANCE AUDITING Performance auditing is an independent, objective and reliable examination of whether government undertakings, programmes, systems, activities or organisations are performing in accordance with the principles of economy, efficiency and effectiveness and whether there is room for improvement. Performance auditing seeks to provide new information, analysis or insights and, where appropriate, recommendations. Subject matter is not limited to specific programmes, entities or funds but can include topics related to service delivery, value for money or effects of regulations. Performance auditing places special focus on citizens. The primary questions being asked are whether government is doing the right thing and doing this in the right and least expensive way. The reports generated through the performance auditing process inform Parliament and other institutions charged with oversight of the extent to which audited entities: Procure resources of the right quality in the right quantities at the right time and place at the lowest cost (economy) Achieve the optimal relationship between the output of goods, services or other results and the resources used to produce them (efficiency) Achieve policy objectives, operational goals and other intended effects (effectiveness). ADVANTAGES OF PERFORMANCE AUDITING Performance auditing benefits government by: Promoting good governance, accountability and transparency Creating mechanisms for change and improvement Contributing to learning and change and serving as a basis for decision-making. Promoting good governance, accountability and transparency Performance auditing assists those charged with governance and oversight to improve their performance. This is done by examining whether decisions by the legislature or executive authorities are efficiently and effectively implemented, and whether citizens have received value for money. It provides constructive incentives for the responsible authorities concerned to take appropriate action. Performance auditing affords taxpayers, financiers, ordinary citizens, and the media an insight into the management and outcomes of different government activities. It contributes in a 40 AUDITOR-GENERAL OF SOUTH AFRICA PERFORMANCE AUDIT REPORT 2014

43 direct way to providing useful information to the citizen while also serving as a basis for governmental learning and improvement. Creating mechanisms for change and improvement In the private sector, a company s success can be assessed by its ability to generate a profit. A company that does not continually improve will ultimately be forced to leave the market. There is no similar mechanism in the public sector. While it is possible to reorganise activities in the public sector, and even close some agencies, even the most unsuccessful key ministry will keep some necessary functions. This requires the public sector to create different mechanisms to measure results and ensure continual improvements in government entities. Performance budgeting, management and reporting are commonly used as such a mechanism. Performance auditing plays a role in highlighting problems and promoting change. Contributing to learning and change and serving as a basis for decision-making Performance auditors are not a part of the system they audit, which makes it easier to objectively listen to the views and knowledge of different stakeholders at different levels of the public administration. This enables performance auditors to impart new knowledge and understanding to stakeholders. Such new knowledge promotes learning and change. As resources are scarce, the efficient and effective achievement of objectives is emphasised. Decisions need to be made on how to prioritise different programmes and ministries. Performance auditing serves as a basis for decisions on how to prioritise and make better use of available resources. DIFFERENCES BETWEEN PERFORMANCE AUDITING AND OTHER TYPES OF AUDITING The three recognised types of government auditing are: Financial auditing Performance auditing Compliance auditing. The concept of regularity auditing covers both financial and compliance auditing. Performance auditing may include dimensions of compliance, but not as an end in itself. In performance auditing, compliance with rules and regulations is a tool to assess the performance of the audited entity. The main differences between regularity auditing and performance auditing are highlighted below. ASPECT PERFORMANCE AUDITING REGULARITY AUDITING Purpose Assess whether the performance of the audited entity meets the three Es (economy, efficiency and effectiveness) Assess financial statements, financial management and whether the accounts are true and fair Starting point Presumed problems Done on an annual basis Focus Academic base The performance of the organisation/programme and its activities Interdisciplinary (economics, political science, engineering, health, education, etc) The accounting and financial management systems Accounting and financial management Performance audit report to the FREE STATE provincial legislature 41