Cooperative Governance and Traditional Affairs, KwaZulu-Natal media statement on the findings and recommendations of Section 106 forensic investigations into Ethekwini Municipality by the Honourable MEC Nomusa Dube

6 Feb 2012

Ladies and Gentlemen of the media;
All protocol observed;

Once again thank you very much for joining us this morning. We have just emerged from a session with the council of EThekwini Municipality which was convened for the purposes of tabling the final report of a forensic investigation undertaken by the Provincial Government through the Department of Cooperative Governance and Traditional Affairs in terms of section 106(1) (b) of the Local Government: Municipal Systems Act, 2000 (Act No. 32 of 2000).

This forensic probe into the affairs of the Ethekwini Metro Municipality (EMM) was prompted by various allegations of acts of wrong doing within the municipality which were brought to our attention by various concerned parties.

I received numerous representations including reports in respect of allegations of maladministration, fraud and corruption within the eThekwini Municipality. Documents brought to our attention included the Auditor-General (AG) report for the 2009/2010 financial year; the Internal Audit report as well as a report on an investigation requested by the Accounting Officer of eThekwini Metro undertaken by Mrs Ngubane & Co.

In the interest of good and clean governance, we then designated Mrs Manase & Associates to conduct a forensic investigation.

The scope of the investigation incorporated the following: 

(a) Alleged irregular expenditure resulting from inadequate budgetary controls and controls over payment processes and weak checks and balances;

(b) Alleged abuse of the use of Urgent and Emergency Procurement Policy when appointing service providers;

(c) Alleged non-compliance with Supply Chain Management (SCM) policies and regulations in respect of the various infrastructure and housing related projects;

(d) Alleged unwarranted variation orders being approved by the management without following proper procedure

(e) Alleged non-disclosure of interests by Councillors and Officials of the municipality;

(f) Alleged irregularities in the supply chain management process in the award of contracts, payments and performance management in respect of telecommunications;

(g) Alleged illegal rental and sale of RDP houses;

(h) Alleged irregularities in human resources pertaining to recruitment, selection and appointment of staff within the municipality;

(i) Alleged irregularities pertaining to the abuse of overtime, locomotion allowance, subsistence and travel claims;

(j) Alleged fraudulent practices within the Durban Metro Police and Traffic Police;

(k) Alleged irregularities in the Development and Planning Offices and alleged non-compliance with Street Traders Bylaws; and

Any other consequential matter/s that may arise during the investigation 

Before we proceed to the findings and recommendations;

(1) I want to place on record the following issues that:This indeed was a comprehensive investigation which had a wider scope and superseded all other investigations that had taken place which were specific to particular areas. This investigation extended to new areas and its force or effect is of a nature that its outcome compels the municipality to take decisive action and corrective measures and may inevitably lead to criminal and civil prosecutions if necessary.

(2) This investigation was never a witch-hunt against certain individuals as some peddlers in the public space have sought to portray it but it was intended to confront head-on some of the ills bedevilling this municipality and arrest the rot before it collapses this institution which is an important vehicle in bringing to reality the goal of a better life for all our people.For us, the institutions are much more important than the individuals.

We aimed, through this investigation, to identify some of the weaknesses in our systems and controls and to eliminate any risks that were threatening the effective functioning of this municipality.Of course, where deliberate intention is established that people in certain positions knowingly disregarded processes and procedures with the aim of prejudicing the municipality, we recommend sanctions be taken by the council. We remain steadfast in our resolve to ensure that should anyone be found to have contravened the law we shall always act swiftly, decisively and transparently against maladministration or corruption and, without fear and without favour. 

(3) This investigation will usher in an era of renewal for this municipality and will alter, for the better, the way business will be conducted in Ethekwini Municipality 

(4) This investigation was called for in the first instance by the African National Congress (ANC).It is therefore proper to applaud the African National Congress, as the ruling party in the Ethekwini Municipality for leading the call for us to step in and get to the bottom of these allegations.The ANC has been consistent in its call for good and clean governance in municipalities. We hope through their example and leadership they are sending a message to all parties that acts of wrong doing cannot be swept under the carpet but must be tackled head-on so that all the elements that tarnish the image of our municipalities can be flushed-out. 

(5) Ethekwini remains a world class city; which is an envy of many around the world and one of the most successful stories of the post 1994 South Africa.Its contribution to the KwaZulu-Natal GDP is phenomenal at a whopping 53%.Its contribution to development and change to people's lives is unparalleled when compared to any of the Cities in Africa.It is ranked among the best governed cities on the continent.

The latest shortcomings should not negate these achievements but rather should motivate us to improve.We note that even the most successful of organizations do encounter challenges at some point.It is not the absence of challenges but the manner in which organisations respond to challenges that determines whether those organisations swim or sink. There is a saying that goes "a problem identified is a problem half-solved".This applies to the current state of affairs in Ethekwini. 

Based on the terms of reference I alluded to earlier on, the investigation has made the following findings and recommendations: 

Ten councillors were identified and confirmed as having business interests with entities which conducted business with the EMM. Councillors therefore contravened paragraph 6 of Schedule1, Code of Conduct for Councillors of the Municipal Systems Act, No.32 of 2000 read with section 54 of same Act. Consequently, appropriate action should be instituted by Council in terms of paragraphs 13 and 14 respectively of Schedule 1, Code of Conduct for Councillors of the Municipal Systems Act, No.32 of 2000. 

Allegations were made that the supply chain management process in respect of the supply of a waste volume reduction plant at the Bisasar Road Landfill Site was irregularly and unlawfully influenced by the former mayor.There is sufficient documentary evidence that confirms the Mayor's involvement in the Waste Volume Reduction Plant at the Bisasar Road Landfill Site tender. 

In addition, certain employees of the EMM may have colluded with the company EWS. Consequently, it is recommended that the process be started afresh as the integrity of the process has been grossly compromised and that certain employees of the EMM should be further investigated by the Municipality for negligence and/or collusion with the company, EWS, during this transaction.

The AG stated that the irregular expenditure amounting to R 532,576 million was incurred mainly as a result of contracts awarded to suppliers which were in contravention of the Municipal Supply Chain Management Regulations. Irregular expenditure disclosed in the financial statements for the last three financial years amounts to R 2,188 billion, a substantial increase of 42% for 2010 and a further 158% for 2011. 

As noted by the AG, there was material non-compliance with the SCM policy section 36 (2) of the MFMA in that the deviations from the procurement procedure were not reported to the council. There was clear non-compliance with the Municipal Finance Management Act (MFMA) which requires that the officials must ensure financial resources are utilized effectively, efficiently, economically & transparently and the prevention of irregular expenditure as well as with provisions which require variation orders to be tabled in the Council and the local community be given reasonable notice and be invited to submit representations to the Municipality. 

Of the R532,576 million irregular expenditure referred to by the AG for the financial year ending 30 June 2010, R428 million related to Ethekwini Metropolitan Municipality (EMM's) Housing Unit. The investigating team was not given any compelling evidence of disciplinary procedures having been taken against anyone involved in the irregular expenditure in the Housing Unit or officials responsible for its regularization. 

Many of the (copy) documents were unsigned and undated and many had not been signed by everyone responsible for authorizing such documents and various deficiencies were identified in the documents such as: Payment Vouchers which were unsigned and "Authorized / Certified" for payment ex post facto; Variation Orders which were also unsigned, addressed directly to a sub-contractor and not the appointed contractor; post facto dates of approval to dates of origin; Letters of Appointments / Letters of Award / Letters of Acceptance of Quotation which were undated, reflected differences in values reflected in the letter of appointment and the contract, letters of appointment awarded to contractor prior to completion of the Quotation Evaluation Report or contractor's quotation or tender document being completed. 

Tender Documents not completed fully, being dated and completed post facto to the contractor's "Letter of Appointment"; handwritten unsigned alterations and changes to tender documents; Memorandums of Understanding (MoA) which were not dated and not signed by the contractor yet bearing signatures of the same witnesses in the spaces provided for both the client and the contractor. Various other deficiencies were identified in Quotation Evaluation Reports (Q.E.R); Reports by Head: Housing and Bid Adjudication Committee; and Letters of Amendment. 

The investigating team identified so many deficiencies in the documents provided to the Bid Adjudication Committee to render them useless and inadequate in support of the regularization of irregular expenditure. It would appear that the Bid Adjudication Committee failed to apply their minds and did not exercise due care and diligence in recommending condonation of the Housing Unit's irregular expenditure:

• It would appear that the Deputy City Manager: Treasury contravened the MFMA which requires Municipality officials responsible for financial management to take all reasonable steps to prevent irregular expenditure. It would appear that the former Municipal Manager contravened Section 32 (4) of the MFMA by not promptly reporting irregular expenditure in writing to the Mayor, the MEC and the AG and the former Municipal Manager also contravened Section 62(1) (d) and 95 (d) of the MFMA both of which requires the Municipal Manager to take all reasonable steps to prevent irregular expenditure. Based on the magnitude and seriousness of these findings it is recommended that comprehensive forensic investigations be instituted by the Municipality into each of the contracts identified as irregular in order to identify and discipline the officials found to be implicated in contravening the SCM policy and MFMA in incurring the irregular expenditure. The Municipality must also implement effective controls to prevent unauthorised, irregular and wasteful expenditure.

Disciplinary action be taken against the:

• Deputy City Manager: Treasury, for contravening Section 105 (c) of the MFMA which requires Municipality officials responsible for financial management to take all reasonable steps to prevent irregular expenditure;

• Deputy City Manager: Infrastructure, non-compliance with the Council's SCM Policies and the MFMA as well as a failure to exercise due care and diligence; and the

• Head: Housing also for non-compliance with the Council's SCM Policies and the MFMA as well as a failure to exercise due care and diligence. 

The Ngubane & Co (hereinafter "Ngubane") report dated 18 August 2010 in respect of the Crossmoor, Chatsworth Housing Rehabilitation Project identified that the award to Dr Khumalo Construction of R 6.3m was irregular in that the Bid Specification Committee (BSC) and the Bid Evaluation Committee (BEC) did not meet to approve the bid specifications and to evaluate this tender, respectively; The SCM Policy was therefore contravened; the award was beyond the CIDB grading of the service provider; Housing Management misrepresented the facts to the Bid Adjudication Committee (BAC) by stating that proper SCM Policy procedures were followed; and as a result of the above, the former Municipal Manager's management response to the Ngubane & Co report was incorrect. 

It is consequently recommended that disciplinary action be taken against the Head: Housing, Deputy Head: Housing, and Deputy Head: Supply Chain Management. The Municipality must also recover the irregular expenditure in terms of Section 32 (2) of MFMA. 

During 2006 the EMM called for bids for the rehabilitation of housing units located at amongst others Bayview, Chatsworth. The award was found to be irregular in that this it was split to suit the CIDB grading of the construction company subsequent to the Tender Verifier pointing to the disqualification of the company on the basis that, inter alia, it could not undertake work which was more than R 3 million. 

Again, Housing Management misrepresented the facts to the Bid Adjudication Committee (BAC) by stating that proper SCM Policy procedures were followed; management misrepresented facts to the former Municipal Manager resulting in the former Municipal Manager's management response to the Ngubane & Co report being incorrect. Disciplinary action against the Head: Housing and Deputy Head: Housing, as well as certain members of the BAC is recommended and the Municipality must recover the irregular expenditure in terms of Section 32 (2) of MFMA. 

The former Municipal Manager contravened Section 34 of the Prevention and Combating of Corrupt Activities Act by not reporting certain fraudulent and corrupt activities (reported to him in the Ngubane report) to South African Police Service (SAPS). He also contravened Section 32 (4) of the MFMA by not promptly reporting this irregular expenditure in writing to the Mayor, the MEC and the AG. Further, the former Municipal Manager's failure to report fraudulent and corrupt activities in the Municipality to SAPS was also contravention of section 32 (6) of the MFMA.

The former Municipal Manager only reported this matter two years later, after the interviews with the investigating team. The corrupt and fraudulent activities resulted in the Municipality being financially prejudiced by R 1.1million. It is therefore recommended that the Municipality must take urgent steps to recover the R 1.1million before this matter prescribes; that action must be taken against the companies and individuals involved in this fraud and that the Municipality must recover the irregular expenditure in terms of Section 32 (2) of MFMA. 

Further to the 38 municipal officials identified by the AG as having businessinterests in companies which are conducting business with the Municipality and who had failed to disclose their interest in such entities, an additional 123 municipal officials were later identified by the investigating team. Consequent thereto, such employees contravened Section 4(3) read in conjunction with Section 4(2)(a)(i) and (ii) and Section 5(1) of Schedule 2 of The Municipal Systems Act, Act 32 of 2000. 

This Act requires that Municipality staff members should obtain consent of the Council prior to being party to a contract for the provision of goods and/ or services to the Municipality. Council has swiftly and adequately dealt with disciplining all of the initially identified 38 officials. Similar action should be taken against the additional 123 identified employees. EMM must implement systems to ensure prevention of officials conducting business with the Municipality and the Municipality must recover the irregular expenditure in terms of Section 32 (2) of MFMA. 

A number of exceptions were identified relating to transactions by councillors, employees of EMM and certain suppliers which should be investigated by the Municipality urgently as there still could be a chance of recovering some of the expenditure for the Municipality. Three contracts were awarded to H2O Networks (South Africa) (Pty) Ltd by the EMM for the installation of fibre optic cable (hereinafter referred to as "fibre"); the first two were Section 36 awards, whilst the third was made through the public tender system. 

Prima facie evidence exists that the two Section 36 awards made by the Head: Geographical Information and Policy Office (GIPO) were irregular, in that the two awards did not comply with the requirements of the SCM policies of the Municipality. It is recommended that disciplinary proceedings should be instituted against the Head: GIPO, Senior Manager: Networks and Telecommunication Information Services. The Municipality must also perform an independent legal review of the two awards to limit the risk of exposure. Further, the awards to H2O should be investigated by the Municipality.

A duplicate payment of R 2 629 750.86, was made to Dimension Data on 10 September 2008 after a similar amount was paid to them on 02 September 2008. However, this transaction was subsequently reversed. It is however, recommended that disciplinary proceedings should be instituted against the Head: GIPO, for the negligence resulting into the duplicate payment. 

The allegation that the upfront payment to Dimension Data was irregular appears to have no merit as to date, the investigating team has obtained no evidence pointing to that fact. 

Allegations were made by a former employee that there were irregularities relating to the completeness of revenue, that a supplier was being used as a front to hide irregularities and that revenue and rates were well short of revenue forecasts.No evidence in support of the allegations of irregularities against MetroConnect could be found. Allegations against MetroConnect, appear not to have any merit, unless evidence supporting the allegation is presented.

It was also alleged that SmartXchange was used as a channel to hide irregular financial activities and that the building in which it is located was sold irregularly by the Municipality and that the sale proceeds were misappropriated.No evidence in support of the allegations of irregularities against SmartXchange could be found. Allegations against SmartXchange appear not to have any merit, unless evidence supporting the allegation is presented.

The Municipality decided to develop its own Revenue Management System as compared to purchasing and customising an "off the shelf" package, as they believed that they would receive better value for money. The initial cost of this project was estimated at between R 90 million to R 150 million over a period of four years, from the commencement date of 29 March 2003. The project was only completed in 2011, at which stage the project costs totalledR 474,7 million. 

This variation did not comply with section 116 (3) of the MFMA in that the local community was not given reasonable notice and invited to submit representations to the Municipality. A new contract of R 44.8m for standard support and maintenance payable quarterly in advance for the periods 01 July 2011 to 30 June 2012 was signed on 01 July 2011. In this regard, EMM's SCM Policy was not complied with and this award is irregular.

It is recommended that further investigation, with powers to subpoena third party individuals and documentation, must be performed on the Revenue Management System as the variation from the initial estimate of R 150m to R 474mwithout compliance to MFMA is irregular and material; a new contract of R 44.8m for standard support and maintenance payable quarterly in advance for the periods 01 July 2011 to 30 June 2012 was signed on 01 July 2011 in contravention of the SCM policy; and further significant costs are likely to be incurred by the Municipality on this project.

Upon commencement of the investigation, the investigating team was provided with a number of reports from the Presidential Hotline detailing the alleged unlawful sale of RDP Houses.The investigating team, being aware of the mandate afforded the Special Investigation Unit (hereinafter "SIU" ) by virtue of a Presidential Proclamation, to investigate all matters relating to fraud and corruption involving RDP Housing on a national basis, referred such matters to the SIU for their further investigation.

Allegations of irregularities pertaining to the abuse of overtime within the Electricity Unit of the EMM emanated from Auditor-General's report for the financial year ended 30 June 2010. The management response was that there was gross understaffing of core staff, with more than 50% staff vacancies in electrician, superintendent and clerk of works posts. Also, that there was a chronic shortage of utility experienced electricians in the country. 

Further, The Deputy City Manager: Treasury stated that an investigation has been launched into overtime at the electricity department. The investigation revealed that various irregularities such as Advance / Retrospective overtime approval forms had not been duly pre-authorised and dated by the Section Head and Division Head; Advance / Retrospective overtime approval forms had been pre and post-authorised by the employee, the EMM has contravened Section 10(1) (b) of the Basic Conditions of Employment Act, 1997 (Act No 75 of 1997); No meaningful investigation has been launched into overtime at the electricity department as, only 1 employee was investigated amongst 632 operational employees who qualify for overtime at the Department, hardly constitutes an investigation. 

Management has, however, commenced addressing the issue of vacancies. The investigating team has verified that twenty six (26) electricians have been appointed to the municipality's electricity unit as at June 2011. In this regard, further investigation is required by the Municipality on the abuse of overtime and EMM must recover all overtime that was paid to its employees irregularly and disciplinary actions is to be taken against the section heads and certain employees.

It would appear that prima facie evidence exists in support of the alleged irregularities in human resources pertaining to recruitment, selection and appointment of staff within the municipality. The appointments and promotion of certain employees immediately after completion of their traineeship from a TK10 grade to a TK14 grade appears to be irregular in that other employees were prejudiced as they had more experience and qualifications than those appointed. 

It appears that the post of Senior Manager: Applications and Projects was earmarked for a specific employee, making such appointment irregular and thereby prejudicing all other applicants and prospective applicants. It is recommended that action be taken against those responsible for the irregular appointments and promotions and against the Deputy Head: Applications and Projects.

Allegations were made that there was favoritism in the market allowances paid to certain senior managers of the eThekwini Municipality. It was further alleged that the provisions of section 57 of Act 32 of 2000 were not complied with in respect of the employment of certain senior managers. In the absence of any approved policy or any act regulating the scarce skills or market allowance, there is no evidence indicating that the former Municipal Manager acted irregularly and/or beyond the mandate afforded to him by Council in this regard. 

It is apparent from the Council records examined by the investigating team that the former Municipal Manager was duly authorized to address and implement a senior management retention scheme by increasing their remuneration in accordance with the research conducted by him and presented to Council during 2008. It would appear that Council has subsequently identified shortcomings in the process used during the initial awards during 2008 by deciding to formalise the awarding of such allowances by establishing various committees to address same. 

Of the eleven (11) contracts, drafted in terms of Section 57 of Act 32 of 2000, provided to the investigating team it would appear that none was fully completed in all aspects, therefore certain requirements of section 57 on the contracts are not met. Seven (7) contracts of senior managers reporting to the Municipal Manager were not renewed and therefore contravene section 57. It would appear that any senior manager reporting to the Municipal Manager whose contract has not been renewed is employed by the Municipality in contravention of section 57 and any remuneration paid thereto may be irregular. 

In addition, section 57 states that the employment of managers reporting to the Municipal Manager is subject to a separate performance agreement. It then appears that without a performance agreement, any employment of a manager reporting to the Municipal Manager is also in contravention of section 57 and any remuneration paid thereto may be irregular. The EMM must take appropriate steps to ensure that section 57 is adhered to and a coherent policy should be developed to deal with all aspects related to Section 57 contracts. 

The tax implications of the market/scarce skills allowance payments should be further investigated to ensure that the Municipality complied with the appropriate tax regulations. No further market/scarce skills allowances should be paid until Council approves the appropriate policies.

Allegations were made in an undated anonymous letter of complaint and an undated letter of complaint / grievance from a former employee, mentioning numerous Metro Police members and support-staff as perpetrators of a host of irregular activities including, inter alia, corruption, fraud, maladministration and sexual harassment. 

The allegations of irregular overtime claims submitted against inter alia Director and Superintendent, appear to have substance in that procedures contained in the Conditions of Service were not adhered to. There is also substance in the allegations that 30 Trainee Constables recently employed by the Metro Police purchased their driver's licenses in order to satisfy recruitment criteria, and that these recruits were referred to the illegal driving schools by Metro Police College instructors and the Hawks are conducting an investigation into the matter.

Whilst an investigation into allegations of nepotism within the Metro Police has confirmed that several high ranking officials have direct family members employed within the Metro Police we have, to date, not secured evidence that directly implicates these members in influencing these appointments.There is substance in the allegation that Metro Police revenue is being negatively affected by the fact that a Metro Police Constable is operating an unauthorized abnormal loads escort business, and thereby taking normal business away from the Abnormal Loads Section of the Metro Police. 

Finally, there is evidence implicating at least 14 Metro Police officers in the operation of taxis, this in contravention of Durban Metro policy and section 38 of the National Land Transport Transition Act, disqualifying them from holding a taxi license. These police officers were identified because they had outstanding fines ranging from R 5 100.00 to R 117 250.00. A certain Metro police official who has a pending criminal prosecution is to be further charged with misconduct and a full investigation should be conducted into the conduct of all the other persons involved in the matter.

A full investigation is also required into overtime claims paid to officials with a view to recover the monies paid and to take action against those found to be guilty of misconduct and contravening the applicable policies and MFMA. The Municipality should make a follow up and be up to date with the investigation by the Hawks to ensure that appropriate action is taken against those who are found guilty of the driver's licence fraud and an independent review of the said Trainee Constables in order to test their driving abilities is required. 

Disciplinary action should be taken against the official in respect of the transgressions relating to his misconduct regarding the abnormal load escort business and the disregard he has for regulations and processes. Action must also be taken against all Metro Police officials conducting taxi businesses with further investigation into other Metro Police officials conducting Taxi business be conducted. Numerous other allegations were levelled against the Metro Police which the investigation team, due to time constraints, have not investigated. 

Consequently, further investigation, with powers to subpoena third party individuals and documentation, should be conducted on the Metro Police Unit.

With regard to the Warwick Early Morning Market, it is proposed that the eThekwini Metropolitan Municipality Council be directed to urgently explore alternative measures to this most deplorable and potentially disastrous state of affairs. Urgent measures to mitigate the health and safety conditions must be implemented by the Municipality. 

Allegations were made that the former Mayor's wife had and / or has a business and / or financial interest in Isidingo Security, a substantial provider of security services to the Municipality. There was no evidence to support the allegation and no further action is warranted until evidence becomes available to substantiate this allegation. 

A sample of four (4) contracts was selected for further investigation from the irregular expenditure mentioned by the AG in section (d) of this report. The results of which are detailed below. Three contractors were awarded contracts, under Section 36 of the SCM Policies, to construct low cost houses under the Westrich Housing Re-habitation Programme: Phases 1 & 2. The appointments were made based on the rate of R59 150.00 (excluding VAT) per unit. 

The values of the three contracts were R 9.7m, R 6m and R9m respectively. These contracts were for the demolition of the existing 16 m² dwellings and the construction of new 40 m² houses. Despite requests for explanation, we have, to date not been provided with the reason for the use of section 36 of the SCM policy in awarding these contract.It was found that the three contractors were given appointment letters before they submitted the tender document forms and other appropriate documents, two of the contractors did not issue proper tax invoices, as required by the VAT Act. 

Cession agreements were entered into by all three contractors with the same hardware supplier so that R 3.5m due for the supply of materials could be paid directly to the suppliers by the Municipality and deducted from monies owing to the contractor and there was no involvement of the legal department in the above cessions, therefore, the interest of the Municipality were not protected. 

A variation order was issued to each of the contractors; in two cases to increase the number of units and the value by R 2.7m and in the third to reduce the number of units and decrease the value by R 2m. In all three instances the variation orders did not comply with section 116 (3) of the MFMA in that they were not tabled in the council and the local community was not given reasonable notice and invited to submit representations to the Municipality.

It is recommended that disciplinary action should be taken against the Head: Housing and the Head: Housing Engineering. Controls should also be instituted to ensure that where a contractor does not supply a valid tax invoice, when required to do so, payment is withheld pending the receipt of a valid tax invoice. The Legal department should be involved in all agreements signed on behalf of the Municipality to ensure that the interests of the Municipality are appropriately protected and the Municipality must recover the irregular expenditure in terms of Section 32 (2) of MFMA.

On 13 August 2004, the Housing department prepared a Report to the Executive Committee of the Council requesting bridging finance for the development of the Burbreeze Housing Project at an estimated cost of R18 million and to utilise R6,5 million from the Housing Operating Fund as bridging finance. 

The intention was to build approximately 550 low cost housing units with top structures of 30 square metres and waterborne sewerage, electricity,water supply, storm water disposal together with black tarred roads at the budgeted cost of R18 000 000; an average cost of R32 727,27 per unit. 

The Report to the Executive Committee dated 13 August 2004 invoked Section 187(3) (b) (ii) of the Ordinance No. 25 of 1974 to justify that it would be in the best interest not to invite public tenders. The construction costs amounted to R48,6 million (Including VAT) and a further R8,6 million was paid as consulting fees and for the purchase of the land. Thus the total costs had escalated to R 57,2 million. 

It was found that there was an inadequate feasibility study prior the commencement of the project. A proper feasibility study would have identified problems upfront and would have provided a useful platform to decide on whether it was economically viable to commit to this project or not. Cost and time overruns (from R18m to R57m) experienced on this project, as well as the issue of poor workmanship, may be attributed to the poor controls exercised by the various stakeholders. 

Variation orders mentioned above were irregular in that they did not comply with section 116 (3) of the MFMA in that they were not tabled in the council and the local community was not given reasonable notice and invited to submit representations to the Municipality. A contractor which was not registered with the National Home Builders Registration Council (NHBRC) was appointed.

There was lack of supervision and management of the project. Poor workmanship was identified by NHBRC on the work done by the contractor. Included in this Construction Industry Development Board (CIDB) report are phrases like "shocking and unacceptable, dangerous, substandard, etc." Consequently, the Municipality should take action against all those found to have been negligent. These would include the Head: Housing, the Project Manager, the Consulting Engineers and the Consulting Resident Engineer. 

Contracts should be revised to hold the contractor responsible for damages, where the contractor (for whatever reason) opts out of the contract. In all instances of default, the 10% surety bond in favour of the Municipality should be forfeited as a penalty. Contracts should be revised to include penalty clauses in respect of time over-runs. These penalties act as an incentive for the contractor to complete the project on time. Defaulting contractors should not be permitted to have any involvement in the decision as to who should replace them. 

The EMM should only award contracts for top-structures to contractors who are registered with the NHBRC. These appointed contractors should, in addition, also have the appropriate CIDB grading. Where a development is taken on from an existing developer, a thorough and proper feasibility study should be performed prior to the EMM committing itself and reserving the right to appoint the contractors of its choice. All future variation orders should be referred to the Bid Adjudication Committee for consideration and/or approval, prior to the additional costs being incurred. In order to avoid a conflict of interest, officials from the Housing division should not be permitted to authorise variation orders. 

All variation orders should comply with section 116 (3) of the MFMA in that they should be tabled in the council and the local community must be given reasonable notice and invited to submit representations to the Municipality. As the amount spent by Housing per annum is significant, the EMM should consider employing additional internal resources such as Accountants, Civil Engineers and supporting staff. The professional consultants involved in this project should be reported to their regulating bodies. 

The ultimate responsibility for the poor performance, as identified in the report from the NHBRC, and the poor control over the project and the subsequent over expenditure should be placed with the Head: Housing in terms of Section 105 (1) (a), (b) and (c) of the MFMA. The Hammond's Farm Housing development in Ward 58, Verulam has a number of characteristics that are similar to that of the Burbreeze Housing Development Project described here-above in that , inter alia : The purchase of the land from a developer who had commenced with a housing development project. The condition imposed on the Metro that the land is sold subject to the requirement that the developer should be appointed as the implementing agent. 

The existing contractors should be retained for the development of the project and the use of the common contractors/service providers on both projects. It was found that there was an inadequate feasibility study prior the commencement of the project. 

A thorough and proper feasibility study would have identified problems upfront and would have provided a useful platform to decide on whether it was economically viable to commit to this project or not; Cost and time overruns (from R68m to R351m) experienced on this project, as well as the issue of poor workmanship, may be attributed to the poor controls exercised by the various stakeholders. 

Variation orders did not comply with section 116 (3) of the MFMA in that they were not tabled in the council and the local community was not given reasonable notice and invited to submit representations to the Municipality. A contractor which was not registered with the NHBRC was appointed. There was lack of supervision and management of the project; and Poor workmanship identified by NHBRC on the work done by the contractor resulted in 22 units that had to be destroyed due to stability problems. 

Again it is recommended that the Municipality should take action against all those found to have been negligent including the Head: Housing, the Project Manager, the Consulting Engineers and the Consulting Resident Engineer. The Municipality should re-evaluate and reconsider the awards made in view of the NHBRC reports on the poor quality of its workmanship on the Burbreeze and Hammonds Farm Housing Development Projects.

The ultimate responsibility for the poor performance as identified in the report from the NHBRC, and the poor control over the project and the subsequent over expenditure should be placed with the Head: Housing in terms of Section 105 (1) (a), (b) and (c) of the MFMA and the Municipality must recover the irregular expenditure in terms of Section 32 (2) of MFMA.

In summary, from the investigation, it appears that the allegations made hereunder, have substance and is corroborated by supporting evidence collated and examined during the investigation.The investigation confirmed the following:

1. Non-compliance with and disregard for SCM policies, MFMA and the Municipal Systems Act;
2. Excessive and inappropriate use of Section 36 of the SCM Policy;
3. Lack of budgetary controls on expenditure;
4. Abuse of overtime;
5. Irregular recruitment practices;
6. Evidence of corrupt and fraudulent practices by certain employees in collusion with suppliers;
7. Councillors trading with the Municipality, in contravention of Section 32 of the MSA;
8. Employees trading with the Municipality, in contravention of Section 32 of the MSA;
9. Corruption and fraudulent practices by certain Metro Police officials. 

The Municipality must take appropriate steps to root out corruption and fraud and must prevent irregular and wasteful expenditure. Section 32 (2) of the MFMA requires that the Municipality must recover unauthorised, irregular or fruitless and wasteful expenditure from the person liable for that expenditure. 

We just shared with you a synopsis of what constitutes this report.We have since tabled the detailed report for disposal and action by the Council.We have given the Municipal leaders 21 days within which to respond to this report after which we will make an assessment of whether the actions being undertaken by the council are adequate or require further assistance from the Department. 

We have given directive to the council to immediately implement the following urgent tasks:

• Adopt the report and its findings and provide a comprehensive response to the MEC within 21 days;

• Urgently institute disciplinary proceedings against all officials and councillors implicated in the report:

• Establish and resource the compliance office as a matter of urgency;

• Review and amend the composition of all bid committees;

• Recover council monies from all those liable immediately;

• Immediately undertake investigations where issues require more comprehensive investigation; and

• All disciplinary issues be instituted and finalised within a period of three months upon receipt of this report.

Issued by KwaZulu-Natal Cooperative Governance and Traditional Affairs , February 6 2012

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