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Irregular SoE expenditure highlights need to improve public procurement – Kearney

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Irregular SoE expenditure highlights need to improve public procurement – Kearney

6th October 2022

By: Schalk Burger
Creamer Media Senior Deputy Editor

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The increase in State-owned enterprises’ (SoEs’) irregular expenditure from R61-billion in 2017 to R167-billion in 2021 highlights the need to review the SoE regulatory landscape and re-examine how procurement is governed in these organisations, says global management consultancy Kearney manager Khadija Ameen.

Public procurement makes up about 10% of gross domestic product and, when managed effectively, guarantees taxpayers will realise the benefits of their contributions, she points out.

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“We believe the current approach to procurement governance within SoEs is a key contributing factor to some of the challenges impeding effective public service delivery,” she adds.

Public procurement in South Africa has been plagued with challenges, particularly in the past four years. The Auditor-General’s 2020/21 Public Finance Management Act report found a 58% year-on-year average increase in irregular expenditure, rising from R61-billion in 2016/17 to R167-billion in 2020/21, she notes.

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Further, despite having comprehensive rules and regulations governing public sector buying, there are still considerable losses incurred through irregular expenditure. These losses highlight a pain point in the governance philosophy and frameworks currently instilled in SoEs, Ameen points out.

Balancing efficiency and compliance are key to tackling the conundrum of increasing irregular expenditure despite rigorous policies and procedures.

Derived from Kearney’s extensive experience in public procurement and governance, five core design principles that underpin successful public procurement governance models include accountability, trust, effective compliance, standardisation and efficiency, she says.

These principles constitute the key ingredients for SoEs to achieve an optimal balance between efficiency and compliance.

“Once the governance philosophy has been defined, the next step is to design a governance framework. The governance framework should include interventions to provide flexibility across the organisation,” she adds.

SOE INTERVENTIONS
Four typical interventions include redefining policies and procedures to simplify approval processes while still ensuring compliance with legislation.

“Simplifying policies promotes improved compliance, which in turn reduces the risk of adverse audit findings. Reshaping policies and procedures also reduces the reliance on executive or board-level committee approval cycles, resulting in shorter approval times and greater flexibility to implement operational changes [such as] procurement process improvements,” Ameen says.

Further, streamlining multilayered committee structures to eliminate approval bottlenecks is another potential intervention. By removing these bottlenecks, SoEs can improve their decision-making speed and efficiency and save additional time, she says.

SoEs can also redefine delegated levels of authority (DOAs) to empower tactical decision-making at lower levels within the organisation that are critical for business continuity. Redefining DOAs enables distributed and individual decision-making accountability.

This means individual decision-making accountability cannot be masked by committee structures, she adds.

Meanwhile, instilling control mechanisms, which is a system of rules and procedures, to direct and influence actions by procurement process stakeholders, is also crucial.

An example is Kearney’s Compliance Control Point framework, which applies a stage gate approach to facilitate compliance at critical steps in the procurement process. This framework ensures distributed decision-making, accountability and transparency, resulting in a robust governance model and an ability to audit decision-making at critical points, Ameen states.

“From our experience of applying these principles with our clients, we have seen an improvement in sourcing process times by up to 80%. Through a recent client engagement, we saw a reduction of sourcing process time from 6 to 18 months to two to five months for high-value tenders and from 30 days to five to ten days for high-value request for quotations.”

The value drawn from these cost savings highlights the potential to ensure an efficient, but robust public procurement model across SoEs, she emphasises.

“By instilling these five governance principles into our public procurement system, SoEs have an enormous opportunity to increase compliance, reduce litigation risk and mitigate against unfavourable audit outcomes.

“Additionally, they can unlock vital organisational resources to deliver improved procurement strategies. They also present a significant step forward in curbing billions in future irregular expenditure while improving service delivery in South Africa,” notes Ameen.

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