South Africa’s massive ‘contracts for friends’ problem

The auditor-general has reported high levels of cronyism in the awarding of municipal contracts over the past financial year.

On Wednesday (3 June), the AG revealed that the bulk (264) of South Africa’s municipalities incurred irregular expenditure of R11.473 billion in the 2013/2014 financial year.

Shockingly, it was revealed that 4,043 Supply Chain Management (SCM) contract awards were made to suppliers in which state officials had an interest at 221 auditees (69%) to the value of R3.731 billion.

This is a significant increase from 2012-13 when 1,617 awards to the value of R445 million were made to other state officials at 178 auditees in the prior reporting period.

“As auditees did not have access to information on persons employed at other state institutions, they could only rely on the declarations provided by suppliers. Suppliers did not declare the interest of state officials in 2,446 instances at 193 auditees with a value of R2.901 billion,” the AG’s report said.

4,043 contracts – valued at R3.7 billion – were awarded to suppliers in which state officials had an interest

Releasing his report on local government audit outcomes for the year under review, auditor-general Thembekile Kimi Makwetu said that 17% of 268 municipalities and 57 related entities achieved clean audits in the 2013/2014 financial year, up from 9% before.

Status of financial health
Status of financial health

Awards to employees and councillors or other state officials SCM regulation 44 prohibits awards of contracts and quotations to employees, councillors or other state officials, or entities owned or managed by them, if they are in the service of the auditee or if they are in the service of any other state institution. Such expenditure is also considered irregular.

“During our audits, we identified such prohibited awards and also tested whether the legislated requirements with regard to declarations of interest had been adhered to,” Makwetu said.

The auditor-general said that 304 awards were made to suppliers in which employees and councillors had an interest at 72 auditees (22%) to the value of R60 million.

This is a regression from the previous year when awards to employees and councillors were identified at only 55 auditees.

A total of 189 employees, 21 councillors and 198 suppliers benefited from these prohibited practices, the report said.

This transgression was identified across the following provinces:

Province Transgressing municipalities
Eastern Cape 15 municipalities, including Nelson Mandela Bay Metro and Buffalo City Metro
KwaZulu-Natal 13 municipalities (including eThekwini Metro) and one
municipal entity
Free State 10 municipalities and one municipal entity
Mpumalanga 9 municipalities
North West 8 municipalities
Limpopo 5 municipalities
Northern Cape 4 municipalities
Gauteng 3 municipalities (including Ekurhuleni Metro and Tshwane
Metro) and one municipal entity
Western Cape 2 municipalities

“We are concerned about the awards to employees and councillors, as these could have been prevented or detected by implementing basic controls, such as employees, councillors and suppliers submitting declarations of interest and checking auditees’ personnel records and information at the Companies and Intellectual Property Commission,” Makwetu said.

At 47 of the 72 auditees, employees and councillors (12 councillors and two mayors) did not declare their interest in awards with a value of R31 million.

Suppliers did not declare their interests at 46 auditees.

Audit graphs
Audit graphs

“It is of concern that this practice is increasing, as we have been reporting on this matter for a number of years and recommending that auditees implement proactive processes and insist on declarations.”

“The failure by suppliers to declare the interest of employees, councillors and other
state officials constitutes a fraudulent act and should be investigated and dealt with
in accordance with legislation,” Makwetu said.

As part of its audits of SCM, the AG tested 7,374 contracts (with an approximate value of R42.675 billion) and 15,189 quotations (with an approximate value of R799 million).

Over half of the auditees (172) underspent their capital budgets by more than 10%, while a quarter (79) overspent their capital budgets by more than 10%, the report said.

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South Africa’s massive ‘contracts for friends’ problem