Health sector procurement in South Africa: A look at 2 major bills

Recently, in a major feat for transparency and accountability, the North Gauteng High Court ordered that the public must have access to Covid-19 procurement contracts – details of which, until now, have been kept away from the public eye as the government cited confidentiality clauses.

This victory for the Health Justice Initiative – which brought the court application – is crucial given the staggering size of public procurement contracts in the health sector.

According to Zukiswa Kota, South African programme head at the Public Service Accountability Monitor, this judgment deserves celebrating “as it deepens the case for transparency in public procurement and effectively challenges the many reasons often used to evade publication”.

“Ultimately, what we need is proactive disclosure that is built into procurement legislation and – more importantly – is adhered to by government,” said Kota.

At the moment, our procurement budget is about R1-trillion, which means that we are losing between R300-billion and R400-billion each year as a result of corruption linked to public procurement.

“It is inconceivable,” she said, “that in 2023 there continues to be limited transparency around fairly basic info – in this case Covid-19 vaccines. “The fact that there is no explicit transparency is an indictment and something we need to reflect on.”

The need for transparency has also been affirmed in the HJI judgment. “Non-disclosure of any of the records sought means that a shroud of secrecy is placed over the entire negotiation, procurement, and payment process – the very mischief our Constitution and legislation such as Paia seeks to address,” the judgment states. Section 217 of the Constitution states that public procurement by any state organ must be “in accordance with a system which is fair, equitable, transparent, competitive and cost-effective”. 

The case for transparency

The call for open contracting and to strengthen public procurement legislation is not new. It is also not confined to Covid-19 vaccines, but all public procurement, also in the health sector.  

Dominic Brown, director at the Alternative Information & Development Centre, also recently made the case for transparent procurement, during a webinar on the launch of a report on pending legislative and regulatory changes in the healthcare sector. The Rural Health Advocacy Project (RHAP) compiled the report that also provides several recommendations for procurement reforms.

“The level of public procurement in the country is approximately 25% of GDP and the majority of government’s involvement in the economy is through this procurement, so it’s no small issue. It’s of extreme significance,” said Brown.

He said that in 2016, the former chief procurement officer in National Treasury estimated that between 30% to 40% of the country’s procurement budget is lost to inflated prices and fraud by the private sector. At the time, this amounted to R230-billion.

“At the moment, our procurement budget is about R1-trillion, which means that we are losing between R300-billion and R400-billion each year as a result of corruption linked to public procurement, and this has major detrimental impacts on service delivery.”

Putting this impact into perspective, especially as it pertains to the health sector, RHAP’s director, Russel Rensburg, said during the same webinar that provinces can spend up to 30% of their health budgets on the procurement of goods and services, which can run into billions. “Contrast this with the huge chunk spent on employee costs (often between 60% and 65% of health budgets), and growing inefficiencies and waste due to non-compliance to legislative prescripts – the pool of money remaining for health services is limited,” he said.

“Lack of compliance with financial management policies, particularly around supply chain monitoring policies, has resulted in the deterioration of several financial management indicators. We’ve seen an increase in qualified audit opinions of health departments and an increase in irregular and wasteful expenditure – amounting to R6-billion in the last financial year,” said Rensburg. “Competent financial management is essential to ensuring that maximum value is achieved from the resources deployed.”

The need for this “competent financial management” in the public sector was highlighted again last week when the Gauteng health department’s annual report for 2022/23 was tabled in the provincial legislature. It showed irregular expenditure of more than R2-billion, which means legislative prescripts were not followed in the procurement of goods and services, among others. In the Auditor-General’s (AG) report, she flagged the irregular expenditure, saying there were no effective and appropriate steps taken to prevent it. “The majority of this irregular expenditure,” the AG stated, “was caused by the department’s failure to invite competitive bids” when procuring goods and services.

Legislative reforms and procurement

Currently, in Parliament’s National Assembly, MPs are set to deliberate on the Public Procurement Bill. The bill provides for far-reaching reforms in public procurement. In the National Council of Provinces, deliberations on the National Health Insurance Bill are under way. This bill also provides for far-reaching reforms to how health services will be structured and funded.

Both pieces of legislation have major implications for procurement in the health sector.

Yet, with these legislative reforms under way in Parliament, some stakeholders say that neither bill in its current form will be a silver bullet to address all shortcomings in public procurement in the health sector. Questions also remain about whether these bills will ultimately result in real consequences for errant public officials in supply chain management or overreaching political office bearers.

Added to this is the overlap between provisions in the two bills, several provisions that lack clarity, and some areas of conflict between the bills that may lead to confusion down the line.

The case for alignment between the bills

The Public Procurement Bill aims to standardise and create a uniform regulatory framework for all procurement by government departments and entities. The NHI Bill, in turn, if passed, will transform how publicly funded health services are organised and delivered. The bill provides for an NHI Fund that will “strategically purchase healthcare services on behalf of users”.

Rensburg explains that this fund must transfer funds directly to accredited and contracted central, provincial, regional, specialised and district hospitals based on a global budget or Diagnosis-related Groups. The bill also provides for an Office of Health Products Procurement, he said, but the exact scope of this office’s mandate is not yet clear.

According to the bill, this office will be responsible for “the centralised facilitation and coordination of functions related to the public procurement of health-related products”.

According to Yana van Leeve, from the law firm ENSafrica, the NHI Fund will be a S3A public entity, so the procurement bill will apply to that entity. S3A public entities under the Public Finance Management Act can be defined as a public entity with the mandate to fulfil a specific economic or social responsibility of the government and they depend on government funding and public money.

Van Leeve was also a panellist during the RHAP webinar.

She explained that section 217 of the Constitution will also apply to this process of acquiring services because the NHI Fund will be engaging in public procurement when it engages healthcare service providers and health establishments in both the public and private sectors. Van Leeve said it is not clear in the NHI Bill, however, that “there is an appreciation that this dimension of the scheme will amount to formal procurement and will thus be subject to normal procurement law”. 

“The implication would then be that one of the prescribed forms of procurement, for example, quotations or open bidding, must be used to secure the services of these health service providers.” According to her, the NHI Bill, however, creates the impression that there is a different type of arrangement to be considered for the acquiring of such services. In section 39 of the NHI Bill, for example, accreditation of health service providers is required.

The procurement bill, in turn, provides for a Public Procurement Office that must create and maintain a database of prospective suppliers. Departments or other public entities may only procure from suppliers listed in this database. This may result in some practical problems as the requirements to be added to the existing central supplier database of National Treasury may differ from what the NHI Bill requires from suppliers. For example, to get on the database, Treasury may consider a legitimate entity as one with a valid tax certificate, but, said Van Leeve: “If you are procuring health products, for example, you may need other things to accredit a potential supplier, which Treasury does not necessarily look at when it builds its database”. 

“So, immediately you can see there will be tension between what the NHI envisages for creating its services and products lists versus what the Public Procurement Office will develop in terms of the national supplier database. So, on the one hand, NHI is creating a special procurement system for health and providing for units and committees that will be responsible for identifying health services and buying health products, and it’s not clear how these two pieces of legislation are going to interact.”

Van Leeve did say, however, that it is possible that the finance minister “can differentiate between institutions and categories of procurement, but nothing in the procurement bill currently requires the minister to do so and there is no guidance on the considerations relevant to differentiating between categories of public institutions”.

She said it is possible for the bill to still make clear provision for the minister to make exemptions from the procurement bill. Currently, section 56(b) of the bill, for example, only provides that “the Minister may, with or without conditions, by notice in the Gazette, exempt a procuring institution from any provision of this Act, if (a) national security could reasonably be expected to be compromised, or (b) the procurement is to be funded partially or in full by donor or grant funding and such exemption will benefit the public in general or a section of the public”.

The shadow of politics through the blurring of the administrative and political interface often becomes a problem.

But Van Leeve insists that one way or the other, “it will be important, certainly in the way in which the NHI and procurement bills become operationalised, for there to be comity between the bills”.

The RHAP report also recommends that “the relationship between health authorities and the public procurement structures proposed in the draft Public Procurement Bill must be clarified. The Public Procurement Bill makes no specific reference to health procurement as a special type of public procurement. At the same time, the draft NHI Bill contemplates a very particular regime in respect of health procurement. These two draft bills will have to be aligned.”

According to the report, “the tension between the decentralised nature of public finance management in South Africa under the PFMA and Municipal Finance Management Act on the one hand, and the highly centralised nature of public health services spending under the proposed NHI on the other hand, will have to be addressed”.

The shadow of politics

There are also other considerations besides overlapping provisions in the two bills – the shadow of politics through the blurring of the administrative and political interface often becomes a problem.

Rensburg highlighted, among other things, it is still not clear how compliance with procurement policies will be audited and how often, or what the different sanctions will be for those not complying. “We see, especially with emergency procurement, that managing procurement functions is open to a lot of different kinds of pressures. The procurement bill does create frameworks for public office bearers to not be involved in the procurement process and for subject matter experts to be involved in procurement decisions, but there are a lot of things happening in the shadows that you can’t explicitly link to involvement of political principles in administrative processes,” he said.

“There is an added complexity,” Brown said, “when you hear, for example, of ANC tender committees, or when there is a tender chairperson who then can determine who gets and doesn’t get various contracts. This is deeply rooted in the state – from local government all the way up to national level, and across state-owned enterprises.”

Case in point, in the public health sector, the Digital Vibes scandal epitomised this “complexity” when the then health minister, Dr Zweli Mkhize, was implicated in tender irregularities and subsequently resigned.

Another criticism of the Public Procurement Bill is that it leaves a lot, arguably too much, of the detail of how procurement will actually work up to regulation rather than setting it down in primary legislation. This, suggested Caroline James and Sam Sole in a recent Daily Maverick article, leaves the door open to political interference.

Corruption Watch’s executive director, Karam Singh, during a different webinar in August on the procurement bill, by the Special Interest Group on Public Procurement Law, also flagged some gaps in the definitions in the bill, especially around issues such as conflicts of interest and politically exposed persons.

In terms of chapter three of the procurement bill that deals with procurement integrity and prohibition of certain practices and debarment, anybody who is involved in the procurement process – that is, from the accounting officer, bid committee or tribunal – must comply with the prescribed code of conduct, failing which will constitute misconduct. According to Singh, however, the bill falls short of stipulating who must issue the code of conduct, how it would be updated, and where it would work, as well as where or when it must be made available. “There is very little detail on how misconduct would be handled,” he said, “and so there is a gap between understanding what this code of conduct would be, how it would come about and if it will be presented for public participation and public comment.” He said it is also unclear what would be the enforcement mechanism which would stand behind the code of conduct to make it effective.

Responding to concerns about tender corruption risks

In June this year, during a briefing by Dr Nicholas Crisp, the deputy director-general in the Health Department, on the NHI Bill to MPs in the National Council of Provinces, concerns were flagged about the risk of tender corruption in the NHI Fund. Later, in August, during a briefing to MPLs in the Western Cape legislature, the same concerns were raised.

At every point, Crisp insisted, “the NHI Fund will handle very little by way of tender. The accreditation is not a tender process. It’s voluntary registration by a service provider – public or private – as long as they meet the criteria. The prices will be fixed and the way services are delivered will be fixed when it comes to the procurement.”

According to Crisp, when it comes to the procurement processes for goods, particularly health products, the NHI Fund is only involved in the first stage. “The fund would not go about the logistics of purchasing anything. The providers needed to purchase once those prices were set. There was far less vulnerability in the fund than first thought when one looked at the bill,” he said.

Spotlight followed up with Crisp for further clarification in lieu of the RHAP report and the implications of the procurement bill for the NHI Bill. He said that, according to the NHI Bill, the fund will determine the formulary that it will pay for and will establish the prices of the items in the formulary. “It is the intention that the NHI agency will not buy any ‘health products’ and will not have storerooms and warehouses since the agency (the NHI Fund) is not a provider of services. The providers will buy what they need to deliver the benefits that they are accredited to provide. Accredited providers (public and private) will buy at the approved NHI prices and this is how the health department works now,” he said. “The provincial health departments do the buying and storing, etc.”

He stressed that the fund will not go on tender for healthcare providers. “The bill in s39 says that providers will be accredited and all accredited providers will be paid for the benefits that they deliver. So, it is intended to not be exclusionary.”

On the implications of the Public Procurement Bill for the NHI Bill, he told Spotlight the department is still studying the procurement bill and these issues (as raised in the RHAP report and through various stakeholders) are being considered. He also noted that according to the NHI Bill, “if any other law, except the Constitution or PFMA, conflicts with the NHI Bill then the NHI Bill prevails. But we will want to engage with the intentions, merits and any potential challenges with Treasury.”

Have your say

The public have until 15 September to make written submissions on the version of the NHI Bill currently before the National Council of Provinces. Meanwhile, Treasury briefed MPs in the Standing Committee on Finance on the Public Procurement Bill this week. The deadline for written submissions is 11 September. DM

This article was published by Spotlight – health journalism in the public interest.

Source: https://www.dailymaverick.co.za/article/2023-09-08-health-sector-procurement-in-south-africa-we-look-at-2-major-bills/

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