Procure-to-pay in public sector
Automated P2P process in government departments is essential for clean audits.
In order to reverse the rising incidents of wasteful and unauthorised expenditure, supply chain management and procurement processes within South African government departments, SOEs and municipalities must be upgraded to make use of modern procure-to-pay (P2) processes.
That's the view of Diederik Jordaan, managing director of Gen2 Group, who says the latest Auditor General of South Africa's annual report is deeply concerning.
The report highlights an ongoing deterioration in the audit results of the country's municipalities. Of the 257 municipalities and 21 municipal entities reported on for the 2016-2017 financial year, only 33 (13%) managed to produce unqualified, clean audits.
In addition, the percentage of municipalities that had serious non-compliance issues relating to supply chain management increased from 63% to 73%. There was also a 75% increase in municipal irregular expenditure, up from R16.2 billion in the previous year to almost R28.4 billion in the review period. Included in that figure was over R15 billion of irregular expenditure that had been incurred in previous years, but only identified and reported on in 2016-17.
Even so, the remaining R13.3 billion of reported irregular expenditure represents 4% of the total local government expenditure for the year. According to the AGSA report, this includes payments made on contracts that had been awarded irregularly in a previous year, but which were still being paid.
Expenditure identified as 'fruitless and wasteful' rose to R1.5 billion, an increase of 71% on the previous year.
"It's not clear how much of all this irregular, wasteful and non-compliant expenditure is a result of corruption, and how much money was lost purely because of irregular processes. The AG noted that 78% of municipalities simply did not comply with required procurement processes.
"What is clear, and what the AG pointed out in the report, is that municipalities did not achieve their objectives; money that should have been directed towards the delivery and maintenance of municipal infrastructure and services is simply not available. This ongoing state of affairs is having a severe impact on the lives of ordinary South Africans every single day," Jordaan says.
According to Jordaan, one of the key reasons for 'irregular' procurement processes is that the processes that are in place can be, and are, easily circumvented or ignored.
Added to that is the fact that the required procurement processes in South Africa are complex. Managing suppliers and vendors is complicated enough in any organisation, anywhere in the world. However, complicating procurement in South Africa is the need to comply with broad-based black economic empowerment regulations.
In 2003, the government started looking at how to update the procurement reforms it had commenced, soon after the first democratic elections, to address two broad focus areas, the promotion of good governance and the introduction of a preferential procurement system under the Preferential Procurement Policy Framework Act (PPPFA) of 2000, which evolved into today's increasingly complex regulations around broad-based black economic empowerment (B-BBEE).
B-BBEE vendor management requires the ongoing production of preferential procurement reports, including reconciliation of all procurement spend against a B-BBEE scorecard. This requires the purchasing organisation to keep track of B-BBEE certificates and their expiry dates so as to be able to claim the correct points for each supplier. It's a complicated, time-consuming process (if done manually) that is wide open to inadvertent human error, as well as manipulation and corruption.
Procurement in the government sector also has to comply with the Public Finance Management Act (PFMA), which was promulgated in 1999 to regulate financial management in the national and provincial spheres of government, and the Municipal Finance Management Act (MFMA) of 2002 that extended the same principles to municipalities.
Around the world, organisations and government departments and institutions are adopting practical, largely automated procurement solutions that offer control and visibility over the entire procurement process, the P2P process.
In South Africa, however, an automated P2P process must also take cognisance of B-BBEE and other regulatory procurement requirements. For example, it is essential that local procurement systems enable the easy, and automatic, management of vendors and suppliers, including their current B-BBEE status, and the inclusion of this into the B-BBEE scorecard calculations.
Best practice international procurement software and systems that are available on a buy or cloud-based software as a service (SaaS) basis generally allow the following processes to be handled automatically and in a way that prevents preset checks and controls from being skipped inadvertently or even deliberately bypassed:
* Create requisitions: but to ensure tight buying controls, requisitions must be limited to authorised organisations and cost entities (areas of costing like departments, contracts, plant equipment, stock stores and so on). These requisitions must then be intelligently routed to the appropriate approver/s.
* Requisition routing and approval: approvers must be pre-assigned an approval level and monetary limit for each cost entity they are authorised to approve. Based on cost allocations on each requisition line, each line item must be routed to an appropriate approver who can then refer, reject or approve the requisition line/s.
* Create purchase order: once the requisition has been approved, it should then be converted automatically into a purchase order, thus preventing any unauthorised items being added to the original requisition.
* Receive goods: this too should be an automatic process. Once the goods are received, the system should automatically extract and link key data from the PO into the receipt to minimise manual data entry.
* Process invoice: by matching the already created PO and receipt and, if correct, an invoice should then be generated automatically, matching with the physical invoice received, once again minimising the risk of human error, and increasing operating efficiencies. The invoice should then be automatically submitted for approval for payment.
* All invoices for a specific supplier should also be reconciled with the supplier statement before payment remittances can be generated per supplier.
* The generated payment remittances: must be routed automatically to a final payment remittance approval and release process with multi-level payment release approvals, including monetary limits, allowing for final oversight before the final payment release is authorised.
"If all these procurement processes are put in place, we are likely to see a considerable and sustained improvement in future Auditor-General reports as a result of a drop in unauthorised and wasteful expenditure, and less opportunity for corruption," Jordaan concludes.