FINAL REPORT

The previous part of the Nugent Commission report can be found here.

CHAPTER 3: THE SEIZING OF SARS

[1] The transition of SARS from what it was to what it became was brought about by events that are shocking. We think what occurred can fairly be described as a premeditated offensive against SARS, strategized by the local office of Bain & Company Inc, located in Boston, for Mr Moyane to seize SARS, each in pursuit of their own interests that were symbiotic, but not altogether the same. Mr Moyane’s interest was to take control of SARS. Bain’s interest was to make money. This was not a plan for mere succession in public service.

[2] The Commission has no evidence that the parent corporation was complicit in what occurred, as the Commission was told by Bain’s legal counsel it was not, but that does not put an end to the parent’s responsibility. An international consultancy cannot lend its name and reputation to securing work in this country by the local office, and then leave the local office to its own devices. It secures the work through the reputation of the parent, and the parent is then obliged to see to it that the work meets its standards. If it wants to ignore what the local office does then it must leave the local office to secure work on such reputation as the local office might have. It cannot have both the benefit of its name and no responsibility for what is done in its name.

The Evidence of Bain and Co

[3] The head of the local office of Bain at the time was Mr Vittorio Massone. Soon after Mr Moyane took office, Bain was contracted, ostensibly to review, and later to re- structure SARS, which it did, with damaging consequences. Mr Massone said in his evidence that he was not aware of what was happening beneath the surface, and had he known he would have acted differently, but the facts show the contrary. Mr Massone and his local partners knew precisely what was going on, though perhaps they were not initially conscious of how brutal the process would be. An article written by one of its partners was at pains to say, correctly, that the first step in undertaking a project was to understand its environment. The outstanding question for Bain, and it is one that Bain has withheld from being examined by the Commission, is just how much Mr Massone knew about that environment.

[4] Early in the life of the Commission, Bain furnished written submissions on the work it had done at SARS, which it supplemented with further substantial written submissions. It was invited to give oral evidence at a public hearing in support of the submissions. There was no hint in the written submissions, nor in engagements between Bain and counsel for the Commission in anticipation of the oral evidence, of what was to emerge.

[5] Mr Solomon Tshitangano is the Chief Director: Governance, Monitoring and Compliance at National Treasury. He took the Commission through documents concerning the procurement of Bain’s contract. Mr Tshitangano seems to have a sharp eye for suspicious procurement activity. He noted that Bain had ostensibly prepared its bid in only one day, which raised suspicion in Mr Tshitangano’s mind that Bain might have had access to the proposal before bids were invited.

[6] Mr Massone appeared before the Commission to speak to the written submissions that had been made by Bain. Prompted by Mr Tshitangano’s observation that Bain’s bid was ostensibly prepared in a day, counsel asked Mr Massone whether he had met Mr Moyane before the bid was made, which Mr Massone said he had done, but even then he concealed much of what had occurred.

[7] He said he had met with Mr Moyane on one occasion before Bain bid for the contract. Asked in what context he had met Mr Moyane, he said it was ‘meeting people at events and situations and so on’. He said Bain had had no prior information of the proposal that was made ostensibly to review SARS. None of that was true. Indeed, the evidence of Mr Massone, both the evidence he gave before us, and his evidence in a subsequent affidavit, is littered with perjury, both in what he said and in what he didn’t say. The affirmation made by a witness is not only to tell the truth, but also to tell the whole truth, and that is not what Mr Massone did.

[8] In response to an invitation by the Commission to furnish written submissions on why certain findings should not be made, including that he had perjured himself, Mr Massone advised, through his attorney, that he had truthfully conveyed all he could recall at the time. We regret that we are not persuaded that when giving evidence Mr Massone could not recollect more of his engagements with Mr Moyane than he disclosed. He was deeply engaged and could not have forgotten.

[9] Mr Massone disclosed in his evidence, without elaboration, that at one stage Bain had produced a report for Mr Moyane. After he had given evidence Mr Massone was asked by the Commission to furnish a copy of the report, and an affidavit identifying and describing each occasion he, or any other person from Bain, had met or had contact with Mr Moyane, or with former President Zuma, before the contract was concluded with SARS.

[10] What followed was a period of obfuscation and evasion by Bain, as partners rushed from abroad to control the damage. Ultimately the report was produced, and an affidavit deposed to by Mr Massone was furnished to the Commission. Mr Massone was summoned to appear before the Commission once again, but he was said to have fallen ill and he returned to his home in Italy before that occurred. He did not appear again, notwithstanding that he was directed to do so by the Commission, and he is said still to be ill in Italy, though he has been able to consult extensively with Bain’s advisers in Rome.

[11] Meanwhile, 23 lever-arch files of documents, most of which are irrelevant to matters that concern the Commission, but buried amongst which were certain internal emails I refer to presently, were delivered by Bain. Having furnished the affidavit, and dumped the documents, Bain decamped. It was afforded the opportunity once again for a representative to appear before the Commission to explain its conduct, having been cautioned that its failure to do would necessitate the Commission drawing its own inferences as to what had occurred, but the opportunity was declined. The explanation proffered by its General Counsel for declining the invitation was that ‘at this time Bain believes there is no one other than Mr Massone who can provide meaningful information. Therefore, no other representative of Bain & Co will be attending the hearing on 22 October2018’. That was itself untrue.

Bain’s Approach Towards the Commission

[12] Meanwhile, Bain had commenced its own inquiry, and announced it as follows in a media statement:

‘To reinforce the independence of the investigation and Bain’s commitment to addressing any new facts, we have established an oversight committee made up of senior global Bain partners and outside directors. Athol Williams, a Bain alumnus and a respected independent advisor, will chair this committee on an interim basis. He is a distinguished academic in the area of corporate responsibility, a corporate leader and lifelong social advocate . Bain’s contract with Mr Williams calls for him to do what is right for South Africa, without restrictions’ (emphasis in the original).

[13] As it turned out the committee was not established but Mr Williams was contracted to oversee Bain’s investigation. The Commission has had some useful exchanges with Mr Williams, and he favoured me with a draft preliminary report he had prepared, in which he said his role was focused on aiding the Commission, which was enabled by the following clause in his contract:

‘While engaged, should Mr Williams at any time determine that Bain is not behaving transparently with the Commission, Mr Williams will:

– First raise his concerns with the Bain South Africa Interim Office Head, Mr Tiaan Moolman, and seek resolution in good faith

– If resolution cannot be reached, Mr Williams has the liberty to share his concerns with the Commission’

[14] That is an extraordinary approach to be adopted by a major international consultancy that claims its commitment to transparency. It is not for Mr Williams to do the right thing for South Africa – though I have no doubt he will strive to do so – it is for Bain itself to do the right thing. And it is not for Bain to interpose Mr Williams between itself and the Commission to adjudicate whether Bain is behaving transparently towards the Commission. It is for Bain to demonstrate to the Commission that it is behaving transparently, which is clearly not the case. Indeed, since declining the opportunity to appear before the Commission, Bain has not engaged with the Commission at all.

[15] Should Bain wish to do the right thing, then it should be furnishing the Commission with all information in its possession, which includes the knowledge of its employees or partners, so that the material may be examined by the Commission in front of the South African people, and not confining its examination to one behind closed doors, with Mr Williams adjudicating whether the truth has been told.

[16] I must make it plain that any views Mr Williams might have do not carry any endorsement from the Commission. The Commission will decide for itself whether the truth has been told, and the way Bain has gone about things gives us no confidence that the full truth will indeed be told. Nothing makes it more plain that Bain has withheld, and continues to withhold, information from the Commission, than the preliminary report prepared by Mr Williams, from which it is apparent that even he has yet to be told where the truth lies.

[17] According to the report, Bain has located 3 000 documents that are relevant and 114 it has classified as ‘heightened relevance documents’, of which ‘many, but not all’ are said to have been submitted to the Commission. I am not sure what is considered to be many, but of the 23 files submitted to the Commission, no more than a handful of documents were relevant.

[18] What is more, according to the report, ‘while Mr Massone would certainly have had the most to offer the Inquiry’, there are ‘other senior Bain SA staff who could have shed some light on certain matters which may have been valuable to the Inquiry’. In fact, we are told in the report, the Bain investigation has conducted ‘extensive interviews with key individuals who were known to be involved with the SARS projects or whose names surfaced during the document reviews’, and ‘the investigating team intends to conduct interviews with at least 17 individuals’. So much for the statement by General Counsel from Boston that ‘at this time Bain believes there is no one who can provide meaningful information’ to the Commission’. Even if some came to light only after that was written, it is apparent from the email correspondence, and their supporting affidavits accompanying that of Mr Massone, that at least Mr Stephane Timpano and Mr Fabrice Franzen, who were deeply involved in the project, and are still partners at Bain, could have provided ‘meaningful information’, which Bain is now withholding from examination by the Commission.

[19] While the Commission has not yet heard the full truth from Bain, the evidence before it tells a story that is disturbing enough.

[20] The affidavit of Mr Massone reveals that SARS was one of the first ‘targets’ in a campaign by Bain to get access to business in the public sector. Mr Massone met many times with Mr Zuma, and no less than seven times with Mr Moyane, before it bid for the contract. It reveals that Bain had planned in advance for the restructuring of SARS even before it had set foot in the organisation. And it reveals that the Minister of Finance, and the Bid Evaluation Committee and Bid Adjudication Committee of SARS, were misled by non-disclosure, which could amount to fraud.

[21] According to Mr Massone, his first meeting with Mr Moyane was arranged by Mr Duma Ndlovu pursuant to a written agreement between Bain and Ambrorite (Pty) Ltd, a company owned by Mr Ndlovu and Mr Mandla KaNozulu.

[22] That agreement commenced on 1 November 2013. In it the parties recorded:

‘Bain & Company SA, in collaboration of Ambrorite, has identified the Government and State Owned Enterprise sector as a strategic priority. This sector represents an important share of GDP and is an important buyer of consulting services. It is commonly accepted that to build a sustainable consulting business in South Africa a substantial participation to this sector is required.

In addition, Ambrorite intelligence has allowed Bain in the last few months to acknowledge that in the next few years a number of State Owned Enterprises and Agencies will be subject to leadership and strategic changes and will require significant transformation and turn-around processes. This is at “the core” of Bain activity and skills. Supporting competent, empowered and change orientated leaders in solving important strategic challenges is Bain & Company SA’s most important challenges.

‘However, current Bain positioning in this sector is extremely weak: in terms of brand positioning, relationships, understanding of the internal situations and competitive dynamics, purchasing policies and procedures.’

Bain & Company South Africa is of the opinion that a collaboration with Ambrorite would substantially benefit its business and the probability of success in this sector.’

[23] The agreement went on to record that, in pursuit of its objectives to, amongst others, ‘identify key priority targets in the Government/SOE sector’,

‘an initial analysis performed by Ambrorite for Bain preliminary shortlisted company like SA Revenue Service (SARS), SA Post Office (SAPO), SITA, Eskom.’ (sic)

[24] In short, the owners of Ambrorite would facilitate business opportunities for Bain, and SARS was one of the first targets. Consequent upon that contract, according to Mr Massone, he was introduced to ‘various key leaders, decision makers and executives from the public sector’, including Mr Moyane and former President Zuma.

[25] Mr Massone disclosed ten or more meetings with Mr Zuma. The first meeting, he said, was on 11 August 2012, arranged by Mr Sipho Maseko, and also attended by Mr Ndlovu. He said this meeting related to a project called ‘Phoenix’, which was aimed at Bain getting business in all of South Africa’s public institutions.

[26] He attended a further nine meetings and more until July 2014. On most occasions the discussions pursued the project called Phoenix. At a later stage Mr Massone presented other proposals to Mr Zuma, including a proposal to centralise all government procurement into one agency. He said in his affidavit that he wished ‘to be completely clear’ that at no point in any of the meetings was SARS discussed. That is contradicted by an internal email that he must have overlooked.

[27] Mr Massone said he was introduced to Mr Moyane because, so he was told, Mr Moyane had ambitions of becoming the next Commissioner of SARS, following the resignation of Mr Magashula. The purpose of the meeting, said Mr Massone, was to ‘advise Mr Moyane on how to achieve his professional goals’. That explanation is facile. The agreement pursuant to which the introduction took place proclaims its purpose in explicit terms: the introduction was to secure business for Bain in the public sector, and one of its targets was SARS. Mr Massone must by then have had wind, perhaps from the ‘Ambrorite intelligence’, that Mr Moyane could be the next Commissioner of SARS.

[28] The first meeting with Mr Moyane was on 13 October 2013. By then, according to Mr Massone, he had met Mr Zuma on five occasions. Bain had also prepared a presentation from publicly available sources that comprised a series of 26 slides under the heading ‘SARS 2.0’. The slides identified what Bain considered to be shortcomings at SARS and said at the outset:

‘In order to transform SARS into an innovative revenue & custom agency, SA government will have to run a profound strategy refresh and focus on execution to reach SARS full potential’. (Emphasis in the original.)

[29] It is an extraordinary document. The first question one asks is why it was thought that SARS was not already an ‘innovative revenue and customs agency’, bearing in mind that that was how it was regarded both domestically and abroad? And on what basis it was considered that a ‘profound strategy refresh’ was required? Bain had not yet set foot in SARS. It knew nothing of the road SARS had travelled, nor of the vision upon which its organisation had been built, nor of the plans SARS had in place for its development. All it had were figures drawn from public sources. Quite clearly Bain was in search of business, and a ‘profound transformation’ of SARS would do, whatever the existing situation at SARS.

[30] The next encounter, said Mr Massone, was on 25 February 2014, when, so he said, he coincidentally encountered Mr Moyane at the residence of former President Zuma, and they exchanged pleasantries.

[31] Mr Massone said a meeting with Mr Zuma was scheduled for 3 April 2014, at which the establishment of a central procurement agency was to be proposed. He said that meeting never took place and was postponed to 26 April 2014. He added that he had no document or email that specifically related to that date.

[32] He described the meeting that was alleged to have occurred on 26 April 2014. He said a proposal for the establishment of a central procurement agency was presented to Mr Zuma, as well as the idea of a workshop to be launched after what he called ‘the new government administration’ was in place, a reference to the administration that would be in place after the general election, that was then imminent.

[33] An exchange of emails on 4 April 2014 reveals that the meeting scheduled for 3 April 2014 indeed took place. Mr Massone’s description in his affidavit of what occurred at the meeting alleged to have taken place on 26 April, and the description in the email of what had occurred on 3 April 2014, coincide, from which it can be inferred that they both describe the same meeting, which occurred in fact on 3 April 2014. What is clear from the email is that SARS was indeed discussed. This is the email exchange:

Franzen to Massone:

‘Ciao – just wanted to check how your “big meeting” went yesterday. Take care’

Massone to Franzen:

‘Thank you, Fabrice, it went very well

– Sars is aa go, right after the elections

– central procurement agency: he loves it, wants an implementation plan

– wants to accelerate Phoenix

– -asked us to organise a workshop with the new cabinet of ministries after the elections (sort of new strategy by sector + RDO/mobilization)

So I’d say very well ..

I’ll update the team on next call Thank you’

Franzen to Massone:

‘Congrats !’

Massone to Franzen:

‘Be ready for SARS !!!! Tom passes by for coffee next Friday morning, if you want to say hi to him’

[34] It can be inferred from the exchange that Mr Massone was assured at the meeting with Mr Zuma that Mr Moyane would be appointed Commissioner of SARS, and that Bain was assured it would be awarded a contract to ‘transform’ SARS, after the general election, which was to take place on 7 May 2014. It is probable that Mr Moyane would also have been at the meeting.

[35] On 15 May 2014 Mr Moyane met Mr Massone at Tasha’s Café in Melrose Arch, which Mr Massone described as a ‘general catch-up’. Mr Franzen was also present. Given that SARS was to be ‘aa go, right after the elections’, and that Bain was to be ‘ready for SARS’, and that the general election had recently been held, and that a further presentation was prepared by Bain little more than a week later, it is doubtful the meeting was no more than a ‘general catch-up’.

[36] On 26 May 2014 Bain prepared a presentation called ‘TM First 100 days’. Mr Massone said the document ‘summarizes for the candidate what his/her “report card” should look like after the first 100 days in office, assuming he/she was to be appointed to the job/position then aimed for’. I regret I do not see the document in that way. On its face it is a clear strategy to be followed by Mr Moyane upon his appointment at SARS.

[37] They met again on 2 June 2014 at the offices of Bain, where the ‘TM First 100 days’ was presented. Mr Massone was accompanied by two other partners of Bain, Mr Franzen and Mr Bour. Mr Franzen furnished an affidavit confirming his attendance at the meeting. I place little store on how he described the meeting, which is inconsistent with the presentation that was made, if he is not willing to explain in person what occurred.

[38] At the outset the presentation describes the ‘objectives of the session’ as follows:

– Identify the “big items” (programs, highly leveraged activities, …) that will be fundamental to medium – term SARS transformation that need to be launched at the beginning, plus some possible “quick wins”

– Discuss and prioritize the most important factors that will drive and determine the success of SARS transformation and your personal success as Commissioner

– Deep-dive on the key components of a 100 day plan (and the items to be addressed even before that).

[39] What follows in the 32 slide presentation includes much of what had been contained in the earlier ‘SARS 2.0’ presentation. There is also a slide headed ‘First 100 days: framework and key actions – for discussion’, which lists those key actions under three columns. I pick out some of them for their significance to what happened.

[40] One heading was ‘KEEP THE BALL ROLLING”, under which one recommendation was ‘Launch IT diagnostic’. IT capability had been built up in SARS over a decade, and Bain had no knowledge of what it comprised, yet it proposed that a diagnostic evaluation should be launched, which is indeed what occurred soon after Mr Moyane took office.

[41] Another key action was ‘Testing BH and assessing performance of different components of COO perimeter’. The reference to BH was clearly a reference to Mr Barry Hore, who was Chief Operating Officer (COO). Just how he was to be ‘tested’ is not clear.

[42] Another slide is headed ‘Build a healthy sponsorship spine to accelerate change and identify individuals to neutralize’. Below the heading is a pictorial representation of an hierarchy, with human figures identified as ‘positive sponsorship spine’, ‘external influencers’, ‘watch out’ and ‘to neutralise’. The text reads

– Identify positive change sponsors bottom-up

– Leverage external influencers

– Identify individuals that could hamper change:

– Watch outs

– To neutralize.

[43] A letter written to the Commission by General Counsel from Bain’s Boston office sought to place a benign interpretation on that slide, but we would have given greater weight to evidence of Mr Franzen, who attended the presentation, and was capable of explaining it himself before the Commission. Moreover, the interpretation advanced does not stand up to even cursory interrogation. As it turns out, individuals who might indeed have hampered this radical transformation by Bain were indeed neutralised, and in no small measure, within months of Mr Moyane’s arrival, and the neutralising continued in less brutal form for a year and more.

[44] There are two striking features of the strategy that was planned. The first is that it is all directed at change. It urged identification of the ‘big items’ that would be fundamental to change. Factors must be prioritised that would drive change. Individuals must be identified who would assist with change, and those who would hamper change. What was to be changed in particular, as emerged from the next meeting, was the organisational structure of SARS, a key being the components of the operations division under Mr Hore.

[45] A decision was taken that the organisational structure of SARS would be changed even before Bain and Mr Moyane had spoken to anyone at SARS. Bain knew nothing about SARS other than what was available from public sources. From information furnished to me by Bain it had no more than peripheral experience of a tax collection agency. And without knowledge of how and why SARS was structured as it was, it had no idea of the environment for which it had been structured. What was good for the tax authorities in New Zealand, and elsewhere, of which Bain in any event had only second-hand knowledge, is not necessarily good for SARS, and they might at least have asked those who understood SARS, if that was indeed their concern.

[46] The second striking feature is that it anticipated there would be resistance to the change. Those who would support change must be identified. Those who would hamper the change must be neutralised. Then there were those over whom to keep watch.

[47] This was not a strategy for succession in public service. Public servants succeed one another in service of a common goal, which is the welfare of the state. They have no need to neutralise other public servants. This was a strategy more appropriate to a corporate takeover. The presentation had nothing to do with tax collection. It had all to do with seizing control of SARS.

[48] Another meeting was scheduled to take place at the offices of Bain on 16 June 2014, according to Mr Massone, but he said he had no recollection of whether it took place.

[49] On 26 June 2014 they met again at the offices of Bain, at which a document headed ‘Potential SARS organisation chart’ was discussed. To a large degree it reflects the organisational structure that Bain later recommended.

[50] On 6 August 2014 Mr Moyane attended a breakfast hosted by Bain for its clients and potential clients.

[51] On 28 August 2014, on the eve of the announcement of Mr Moyane’s appointment as Commissioner of SARS, another meeting was held at the offices of Bain, attended on this occasion, according to Mr Massone, by Mr Moyane, Mr Ndlovu and Mr Jonas Makwakwa, who was then an employee of SARS. That meeting coincides with events described in a Bain internal email of that date:

‘Guys,

Just had a call and heard that the Sars announcement should happen tomorrow or monday. Meeting later in the office, to discuss also procurement process

Fabrice/Stephane, how many teams did we say? Can we please think about managers, with and without Galactica? I guess we should have a few weeks to ramp up (procurement process) but we’ll need to have a first contingent to start working asap ..

Thank you Vittoria’.

To which Mr Stephane Timpano replied

‘vittorio,

that’s a great news

The last thinking was to start with 1 team (M+4 to +6), for 3 months to do fundamentally 2 things:

1) run a full operational / strategic assessment of SARS

2) assist Tom in starting properly his new role (direct “CEO” work)

We will be then able, based on the operational / strategic assessment, to build up the platform for a broader SARS transformational program (6-12 months plan)

Let’s discuss team face to face later. stephane’.

[52] What occurred at this meeting could have been elucidated by Mr Stephane Timpano, had he been willing to have his evidence on affidavit examined by the Commission. In his affidavit Mr Massone said no more of this meeting than that Mr Makwakwa ‘shared his personal issues that he had been experiencing at SARS’. We have no hesitation finding that to be yet more concealment by Mr Massone. Having just had confirmation that Mr Moyane’s appointment was about to be announced, and the expressed intention to discuss also the procurement process, it is not credible that they gathered to listen to Mr Makwakwa’s ‘personal issues’ at SARS.

[53] We think it is fair to infer instead that there must have been congratulations all round, as the collaborators, with Mr Makwakwa now drawn into the fold, set about plotting their course towards securing a contract for Bain to undertake the ‘profound strategy refresh’ for the ‘transformation of SARS’ that it had set for itself a year earlier.

[54] An email records a further meeting at the offices of Bain on 22 September 2018, attended on this occasion by Mr Moyane, Mr Ndlovu and Mr Patrick Monyeki. The meeting is not disclosed or explained in Mr Massone’s affidavit. It appears from other evidence that Mr Monyeki is a long-standing friend of Mr Moyane. He appears again later, when the information technology contracts were awarded, which I deal with later in this report.

[55] Clearly Bain and Mr Moyane were in deep collusion to restructure SARS, no matter what they might have found at SARS. Neither was concerned for the interests of SARS, but for their own interests, that were at least aligned with one another, though they might not have been quite the same.

[56] Meanwhile, the public servants at SARS were pursuing the ‘higher purpose’, oblivious to what was to come.

The Procurement of the Contract

[57] After his appointment, on 11 November 2014, Mr Moyane addressed a memorandum to the Minister of Finance, purporting to seek the Minister’s approval to approach independent consulting companies to assist with an evaluation of all its operations, including its operational performance, its information technology infrastructure, and its organisation and governance.

[58] The only basis in the memorandum for undertaking that massive ‘transformation and turnaround of SARS’ was what was said to be ‘the first crack’ that had surfaced with allegations made against the former Commissioner Oupa Magashula’, and a ‘number of media articles over the course of the year and especially the Hathurani and Johan van Loggerenberg matters’. A copy of the memorandum is Appendix 6.

[59] To suggest that a major evaluation of SARS was required because of allegations that had been made concerning Mr Magashula, who had in any event long since resigned, and because of newspaper articles, is perfectly bizarre. His recommendation to the Minister was the following:

‘I therefor request that the Minister considers the above matters and give his approval for me to approach as an initial step a number of consulting companies listed in the SARS database, our service providers, to discuss the above matter with the view of enlisting proposals for a turnaround plan for SARS’.

[60] The memorandum was relied on by Mr Massone to suggest the Minister approved the project, but that is not correct. The former Minister, Mr Nene, said in evidence before us that as this was an operational matter he was required to endorse only the process, with the hope that the implementation would be reported back to him

[61] What Mr Moyane represented to the Minister was untrue, both in what was said and in what was not disclosed. The memorandum conveys an intention to approach consulting companies in order to select one. In truth the only approach that was to be made to consulting companies was to entice them to participate in a procurement sham. What he ought to have said to the Minister is that he had already colluded with Bain on a strategy to restructure SARS, for Mr Moyane to take control, and for Bain to increase its wealth.

[62] Approval having been given by the Minister, SARS (it seems to have been Mr Makwakwa) at first approached Telkom, with a request to participate in a contract that Telkom had with Bain for procurement of the consulting services of Bain. Why would SARS be wanting to secure services by participating in the contract between Telkom and Bain, asked Mr Tshitangano, unless SARS had already decided that Bain should be appointed?

[63] Mr Massone said he had known nothing of the approach to Telkom. Once again that was untrue. On 4 December 2014 he wrote to Mr Maseko of Telkom as follows:

‘I received a call from SARS (the acting COO) who told me that they would like to use Telkom’s contract to give a mandate to Bain – apparently law (or practice) says that they can piggyback another SOE. This will enable an immediate start avoiding long and complicated tender processes.

I hope that’s ok with you. I gave them Ian’s contacts as they want to contact Telkom tomorrow morning’.

[64] When the possibility of participating in the Telkom contract came to nought, SARS turned to a closed tender process, which was in truth a sham, in which five consulting companies, including Bain, were invited to submit proposals for an initial ‘diagnostic evaluation’ of SARS. The Request for Proposals was issued on 11 December 2014 and bidders were invited to attend a briefing the following day. Proposals were to be submitted by 18 December 2014.

[65] Some of the documents submitted to the Commission by Bain, which included pricing of the project, were completed on 12 December 2014. How was it, asked Mr Tshitangano, that Bain was able to complete its pricing within a day, unless it had been briefed on the proposal beforehand? Asked whether Bain had had prior information of the proposal, Mr Massone said it had not. He said it was simple to prepare a proposal in a day, contradicting the email of 28 August 2014 recording that Bain would have a few weeks to ‘ramp up’ the procurement process. Bain had certainly known the proposal was in the offing, for four months or more. Indeed, it had been its architect.

[66] The pricing of Bain’s bid was curious, but not in hindsight. The price offered by Bain for Phase 1 was R2.38 million, calculated at its ordinary rates less a discount of 50%, bringing its price slightly lower than the next lowest bidder. Pricing its bid in that way meant that while phase 1 was undertaken at competitive rates, any further work that followed phase 1 would be at double those rates. As it was said in an email from Mr Massone to his colleagues on 16 December 2014:

‘I think we should put the full pricing in the hourly rates and at the bottom, whatever number comes out, we say we’ll do a 50% discount just for this phase 1

Otherwise it’ll be tricky to change the rates going forward, In the document, the full rates need to be showed’.

[67] That is indeed what occurred. Having completed phase 1, at its discounted rate of 50%, Bain was appointed, by deviation from the ordinary competitive procurement process, to undertake the restructuring of SARS (phase 2) without again bidding against other service providers. On this occasion it charged its ordinary rates, which were double the rates that had secured it phase 1, though it allowed an initial discount of 12%, which later increased incrementally as the contract proceeded, up to about 19%.

[68] In short, Bain got its foot in the door by foregoing R2.38 million of its ordinary rates in competitive bidding, only to secure phase 2 at its ordinary rates less 12% without competitive bidding, which earned it a further R164 million for phase 2. Progression to phase 3 would have earned it about R50 million more.

[69] In his evidence the current Chief Financial Officer of SARS said it was not uncommon, where multiple contracts are envisaged for a project, for bidders to offer a ‘loss leader’ at the outset. If that is indeed the case, we see no proper reason why that should be permitted in public procurement. It has the potential for the abuse that occurred in this case, and we recommend that that form of bidding be reviewed by the National Treasury.

[70] It can be inferred from the email of 28 August 2014 I referred to earlier, and the manner in which Phase 1 was conducted, which I come to presently, that Bain had no intention of undertaking a ‘diagnostic’ evaluation. It said itself that in Phase 1 it would undertake an ‘operational / strategic assessment’ of SARS, to set the platform for the ‘broader SARS transformational program (6-12 months plan)’ that had been planned.

[71] The minute of the Bid Adjudication Committee meeting, at which the recommendation of the Bid Evaluation Committee was accepted, does not identify who asked and who answered the various questions that are recorded in the minute. A copy of the minute is Appendix 7. The minute reflects that the question was asked;

‘Did the BEC consider advisory and implementation as phase 1 and 2 to be done by the same service provider?

to which the answer was:

‘Yes they did, but concluded by saying they will appoint consultants to do advisory and at a later stage go to market again to appoint a service provider to implement. The other reason is that they needed to know what is to be implemented first which will be addressed by the report of from the consultants appointed to advisory phase. It was also mentioned that the idea is that the appointed service provider must give recommendations that can be implemented by any service provider not them alone.’ [my emphasis].

[72] Upon completion of phase 1, however, the contract for phase 2 did not ‘go to market again’, as the Bid Adjudication Committee had been told it would do. Instead SARS deviated from the ordinary procurement process, which, said Mr Tshitangano, is permitted by National Treasury regulations only in the case of an emergency, or if there is only one supplier. There was no emergency, nor was Bain a sole supplier. On the contrary, it was expressly said at the Bid Adjudication Committee meeting that the appointed service provider for phase 1 must ‘give recommendations that can be implemented by any service provider not them alone.’

[73] It is clear from what occurred the previous year that there was no intention on the part of Mr Moyane or Mr Makwakwa that there would be a return to the market for phase 2. Phase 2 had already been planned, and Bain was to get the contract. Once again there was non-disclosure of what had occurred, both in the evaluation and adjudication of the bids, on this occasion by both Mr Moyane and Mr Makwakwa, who was at the meeting of the Bid Adjudication Committee.

[74] We think it can be inferred, both from the pre-determined plan to restructure SARS, and from what occurred in the course of the ostensible diagnostic evaluation, that the procurement process was manipulated to secure the restructuring of SARS by Bain, which would serve Mr Moyane’s interests in taking control of SARS, and Bain’s interest in making money. Moreover, an ‘IT diagnostic’ was indeed initiated, as Bain had suggested, which led to further work being done by another consultancy, at a cost to the taxpayer of a further large sum, that turned out to be largely pointless, which I deal with later in this report.

[75] We have little doubt that the Minister would not have given his approval had he known what was occurring. We also have little doubt that the Bid Evaluation Committee and the Bid Adjudication Committee would not have approved the appointment of Bain had the machinations been disclosed. There is also little doubt that SARS was prejudiced or potentially prejudiced in consequence of the non-disclosure. In both respects it could constitute fraud, and we recommend that the National Prosecuting Authority consider prosecution.

[76] Upon Mr Massone’s revelations, when the partners from abroad scurried to this country, Bain said in its media statement that it had set aside the money it had received from SARS, to be dealt with as the Commission might direct. Upon an intimation from the Commission that it has no authority to dispose of money received from SARS, Bain has now unconditionally paid to SARS all the money it received, together with interest, amounting in all to just short of R217 million. We were told that Mr Massone has also resigned.

[77] While the payment of money, whether by returning fees to SARS, or by sponsoring good deeds, is no doubt admirable, Bain ought to know from the fact alone that three commissions of inquiry are at present underway concerning state institutions, that what the South African people want to know is what happened to their country’s institutions, and the information Bain has will help to find that out. If Bain wants truly to make reparation, then it should give to South Africans what they want, and not what Bain thinks they should have, which it has steadfastly refrained from doing. Payment of money without prior disclosure of the truth, is not reparation but is marketing instead.

[78] What is clear from the evidence I have summarised is that Mr Moyane arrived at SARS without integrity, and once that is the case, we are not able to exclude any of the acts detailed in the terms of reference from having occurred. What we have found and report on are manifestations of the failure of integrity and governance we have observed, but it is probable there were others we did not detect.

CHAPTER 4: THE FABRIC OF THE SARS RESTRUCTURE

[1] Any suggestion that SARS was in a poor state at 1 April 2014 flies in the face of all the evidence. As it was expressed by Dr Randall Carolissen, whose written submission is Appendix 4, when asked whether, in his view, SARS was in need of restructuring in 2014:

‘Absolutely not because we had a well-defined strategic journey that we were on, and we were clear about where we were going, what the next step should be. In some cases where we’re not clear, as they manifest themselves we were agile enough to deal with that. So in fact, let me be quite blunt about this, none of us that participated in that process, myself included thought that this was an optimisation of the journey that we are on. Doing things a bit smarter, because you must always be open. We’re a learning organisation. So none of us anticipated a radical restructuring, not in our wildest dreams,’

[2] He observed that there is always room for innovation and development, and we have pointed out that towards the end of his term as acting Commissioner, Mr Pillay announced that the SARS operating model had been reviewed, and changes were to be implemented, but that is nothing like what occurred.

[3] The first contract awarded to Bain was ostensibly to undertake a ‘diagnostic’ evaluation of SARS. The exercise was shrouded in secrecy from the managers of the various divisions, Mr Moyane having given instructions to Bain on who to talk to, under the eye of a steering committee headed by Mr Makwakwa.

[4] Every managerial employee who gave evidence before us said he or she was either not consulted in the course of the exercise undertaken by Bain, or was consulted only perfunctorily, often by junior employees of Bain. Many were puzzled at why it was thought necessary to ‘fix what was not broken’. With knowledge of what had preceded it, it comes as no surprise that there was little consultation, albeit that Bain contended that there was, but produced no documentary evidence to that effect. The Bain email of 28 August 2014 makes it clear Bain was not interested in finding out why SARS was structured in the way it was structured. Its interest was in finding out enough to enable it to re-structure SARS, whether that was needed or not, or, as was said in the email, to undertake an ‘operational / strategic assessment’ of SARS, to set a platform for a ‘broader SARS transformational program’ expected to take six to twelve months.

[5] Having completed its ‘diagnostic’, which took about six weeks, Bain was appointed to undertake phase 2. Although the Bid Adjudication Committee had been told the appointed service provider for phase 1 must ‘give recommendations that can be implemented by any service provider not them alone,’ and that any later work arising from phase 1 would be ‘go to market again’, that is not what occurred, nor was it intended by the conspirators to occur. Instead, phase 2 was awarded through a deviation from the ordinary procurement process, on spurious grounds, that earned Bain approximately R164 million calculated at its ordinary rates less an initial discount of 12%.

[6] Bain presented four potential organisational structures for SARS, and Mr Moyane insisted upon adaptations, resulting in a fifth that was adopted and implemented. The most significant change insisted upon by Mr Moyane was to combine the roles of overseeing individual tax and of corporate tax respectively into one division called ‘Business and Individual Tax’ (BAIT), reporting direct to the Commissioner. In due course Mr Makwakwa was appointed Chief Officer of BAIT, the effect of which was that he had operational control of all taxpayer affairs.

[7] Much was sought to be made, in justification for the re-structuring, of the fact that the new organisational structure was presented to, and approved by, the SARS Advisory Board under the chairmanship of Judge Kroon, and then by the Minister of Finance. The evidence of Mr Massone and Judge Kroon, together, discloses that that presentation took place over no more than an hour, followed by discussion with Mr Moyane and Mr Makwakwa, who can be expected to have promoted the new structure.

Judge Kroon acknowledged that he, at least, had no knowledge of the organisational structure that then existed, or why SARS had been structured in that way.

[8] We do not place any value on an approval for the re-structuring of SARS founded on no more than a presentation given over an hour, with no knowledge of the structure it was to replace, and with no guidance other than from Bain and Mr Moyane and Mr Makwakwa, all of whom had colluded to re-structure SARS. As for ministerial approval, the evidence of the then Minister of Finance, Mr Nene, was that his approval was for the process of appointing consultants, not the outcome.

[9] The first middle managerial employees of SARS knew of the restructuring was when it had been adopted, and was presented to them as a fait accompli. When the new structure was presented some of the existing units were no longer there and others had been materially altered.

[10] The new organisational structure of SARS was often called the ‘new operating model’ but that is a misnomer. An operating model is a strategy upon which a structure is built. There was no new strategy upon which the structure was rebuilt by Bain. It did no more than restructure the organisation, based largely, according to Mr Massone, upon what Bain considered to be ‘best practice’, drawn from Bain’s second-hand knowledge of other tax collection agencies, with little insight, nor any apparent interest, into why SARS had been structured in the way in which it was, and in what direction SARS was headed.

[11] The effect was devastating for many employees who were displaced, and proved to be detrimental to the efficiency and governance of SARS. Mr Massone said the new structure was an improvement on what existed, if only it had been utilised in the way it was intended, but the fact of the matter is that it was not utilised in that way, and enabled what occurred. Mr Massone said as well they did not understand at that time who they were dealing with, that Bain may have been ‘used’, and in hindsight would have acted differently. An email written on 3 December, two days after Mr Hore resigned, demonstrates they knew exactly who they were dealing with. ‘Goodbye Barry Hore …’, wrote Mr Franzen to Mr Massone on 3 December 2014, to which Mr Massone replied ‘Now I’m scared by Tom.. This guy was supposed to be untouchable and it took Tom just a few weeks to make him resign.. Scary ..’

[12] The principal feature of the new structure, apart from combining all taxpayer affairs into BAIT, was to fragment many of the functions that previously had operated cohesively. The most prominent was the operation of the Large Business Centre. Formerly it had provided large business with an ‘end-to-end’ service. For each of various industries there was a relationship manager, who formed a relationship and interacted with large business concerns in that sector, of which the relationship manager would have specialised knowledge. He or she was supported by various disciplines dedicated to that sector, which enabled all the affairs of the taxpayer, whether it be income tax, PAYE, VAT, and so on, to be serviced from one port of call. The new organisational structure fragmented the various disciplines, for example, sending lawyers to the legal division and auditors to the auditing division, with the result that the LBC was eviscerated, it was no longer one port of call, and there was no overall picture of the taxpayers concerned, nor of the industries in which they operated. We do not suggest such disciplines could not have been effective in such configuration, but without a clear change management plan, informed by genuine consultation spelling out the fundamental defects of the configuration preceding the restructure, it was bound to cause disruption and bewilderment.

[13] That it has been detrimental to business it previously served is evident from the submissions and evidence the Commission received from representatives of professional bodies. Mr Retief, who is the chair of the National Tax Committee of the South African Institute of Professional Accountants, had written an article entitled ‘Turnaround Time at SARS’, describing the frustration now experienced by large business organisations in consequence of the disbanding of the LBC. That was supported by Professor Nel of the South African Institute of Tax Practitioners, who told us that the frustration now experienced by large business has been reflected in declining taxpayer morality, in which there is ‘increased pressure on the tax practitioners to leave out income and to claim expenses that are risqué’. Mr Farber, the senior executive for tax of the South African Institute of Chartered Accountants described how the healthy engagement in SARS of the past has declined over the period now under review. We have no doubt the LBC served an important function at SARS and we recommend it be re-established.

[14] Another case of fragmentation was in the compliance division. Headed by Dr Malovhele, it had developed a tool to measure and monitor tax compliance, from which strategies could be devised to target areas of non-compliance, without which there is obviously no revenue. The tool it developed was commended by the IMF to other countries and representatives from tax authorities in Africa visited to learn from the model. When the new organisational structure took effect the compliance research unit was gone, with some of its functions distributed elsewhere. Dr Malovhele said:

‘And as we speak there’s no BAIT [Business and Individual Tax] compliance programme. There’s no customs compliance programme. There’s no SARS compliance programme, you know, even though SARS went to parliament and said we have the compliance but there isn’t because where it was moved they didn’t have the competency and the skills to do it. So I wrote quite a number of notes to senior people explaining to them there’s a problem here. The compliance research function it’s no more. It’s not there.’ But I never got any feedback or the outcome that I needed I didn’t get.’

[15] Bain’s restructuring of the legal and enforcement units was also damaging. Before the restructuring, SARS had a High Court Litigation Unit, the mandate of which was to deal with significant high court revenue litigation. It worked closely with the LBC and Enforcement to support their operations with agility. Ms Lalor, the former senior manager of the unit explained in an affidavit:

‘The Unit functioned centrally and had a presence in Gauteng, Durban and Cape Town. The workflow was centrally managed and received notification of intended litigation through a dedicated email address. We had direct access to the Chief Officer… when we needed urgent instructions. … We were able to work effectively and cut through the various components of SARS swiftly, when it was required. Similarly, our approval processes for engaging in litigation and incurring legal costs was simple and swift, enabling us to timeously engage Counsel and prepare for litigation.’

[16] Ms Sarita Lubbe said in an affidavit that before the restructuring, approvals for legal action would be granted within 24 – 48 hours, allowing for speedy reaction time, but now they can take many months. The restructuring dissolved Ms Lalor’s job and left the unit without a manager. Bain splintered the unit into regional structures and failed to establish new reporting lines. In Ms Lalor’s words, the unit became ‘a shadow of its former self’.

[17] The Chief Officer: Legal Counsel, Ms Refiloe Mokoena, submitted an affidavit in which, amongst other things, she said the new policy she introduced was approved by EXCO, and she also challenged the witnesses to identify cases in which there had been delay, but that all misses the point. The point is that multiple approvals are now required, whereas the cohesiveness of the old structure avoided that.

[18] The effect on Enforcement was particularly severe. Mr Dion Nannoolal of debt enforcement said:

‘In the past we could have brought a preservation order on a group of companies with maybe four or five signatures or six. Now we need anything between eight and 12 signatures. So I can assure you we’ve lost, and I’ll show you a submission, we have lost possibly hundreds of millions of rands over the last few years because of these inefficiencies.

Legal counsel approval takes 1 month to a year for approval on memos. In summary, it could take up to three years after the original transgression to proceed with a preservation order (as an example) or to commence collection steps.’

[19] The troubles of Enforcement under the new structure were not confined to the ineffectiveness of Legal Counsel. Previously effective enforcement units disappeared altogether, as with a unit known as ‘national projects’, that had investigated organised crime, and a unit known as ‘centralised projects’, that had investigated high profile, sensitive or complex taxpayer affairs. Mr Hendricks, who managed Cape Town office of national projects, described what happened when the new structure was presented:

‘And we looked and we saw but there’s no national project. We asked the question in the open forum and the answer we got was that’s because they don’t exist in the new operating model. That is how we were informed that national projects had been disbanded. There was no consultation. I even asked my national manager at the time, was she consulted, and she said no. She wanted to know if any of us were consulted, the answer was again no. It had just been decided, we don’t know who to this day, that national projects would no longer exist’.

[20] The same happened to centralised projects. Ms Lubbe, who was previously part of that unit, said she was never told that centralised projects had been dismantled:

“I don’t have any formal record, but if I remember correctly, during June 2016 we noticed on SARS’ electronic system used for employee-related functions, such as the submission of leave, that some employees’ reporting lines have been amended. In my case, my direct manager was no longer Pieter Engelbrecht but was Dion Nannoolal. At the time I did not even know who Mr Nannoolal was… The transfer was effected without even one consultation with our team…, the status of our cases or the risks involved in handing the matters over to other divisions.”

[21] Bain’s new structure fragmented units which, said Ms Lubbe, were effective because they had operated ‘end to end’, meaning from the investigation phase (including risk profiling and audit), to litigation related to investigation and recovery. Members of these units were reallocated to different departments, or relegated to supernumerary positions, so that no one unit had sight of an entire case. The effect was that it became impossible to have strategic inputs from legal, audit and collections simultaneously, as had previously been the case, which undermined due governance.

[22] Customs was also detrimentally affected by the re-structuring. The customs modernisation programme between 2011 and 2012 had transformed customs. SARS had halved the time it took to import and had introduced world class automation and substantial compliance improvements with regard to illicit cigarettes, clothing and textile products, and narcotics. In 2013, South Africa received special mention in the World Bank ‘Doing Business’ Report for having improved the most in the ease of trading across borders. In 2015/2016, the World Bank Customs Efficiency Index ranked South Africa on par with countries like the United States and France, the highest it had ever been.

[23] By 2018, South Africa had regressed to pre-modernisation ratings. Inspection processes are said now to be the longest they have been in seven years: 23 days compared to two days in 2013. Customs revenue collections have declined. In addition to the effects of the restructuring, Mr Marais of the South African Association of Freight Forwarders described to us how stakeholder forums that had existed before fell apart, and how the clearance process had slowed to the detriment of the economy.

[24] Ms Rae Vivier was the head of Customs when Bain began its work, but nobody spoke to her. Notwithstanding her role in turning Customs around during the modernisation programme, she found herself in a supernumerary position. Once again, the restructuring fragmented Customs. She said:

‘The new operating model has had the consequence that the units who impact the most on the bulk of the compliance improvement activities in customs report separately into the chief officer at different seniority levels which does not engender end-to-end value chain management of revenue flows and undermines accountability and coordination. Efficiency has deteriorated and inventories have grown substantially (by 319%). Risks are increasing (duty suspension declarations have grown by 8% in the last FY and R9.1 billion gap in Chinese imports of clothing in 2015’.

[25] Mr Massone said the fragmentation of units ought not to have had that effect, if there had been co-operation amongst the various generic sections, but that is not what occurred. The principal basis for the new structure, so his evidence and Bain’s written submissions convey, was that the new structure reflected ‘best practice’ in other countries. The question never asked was whether best practice in, for example, New Zealand or Europe, was suited for this country, bearing in mind the history against which the earlier strategy had been devised. Bain was not even aware that the Tax Administration Diagnostic Tool of the International Monetary Fund had scored SARS as conforming to good international practice on half the indicators, and only one step below on all but one of the rest.

[26] On the connection between declining revenue collection and the new organisational structure, Dr Carolissen said, in support of a careful analysis:

‘Look like I said, let me take the revenue for instance because that I can speak with some authority on. Revenue is driven by the economy. So we know and we can work on how much the economy contribute, there’s various statistical measures we can do. The second thing the policy changes which we have discussed, government had to raise policy, sorry tax rates so I’m not going to talk about it but certainly the slippage in compliance, the figures that I’ve given you and some of the money that’s trapped in the system, certainly had a massive impact on revenue because that speaks to internal efficiencies. Sorry that speaks to the compliance and internal efficiencies, inefficiencies and then the way that we are construct, the LBC clients now have to interface with so many different interfaces where they had one stop entry. So from a revenue perspective this model certainly had not, the indicators are that the model has absolutely put us, put us back. Now you can go and investigate other areas, you can look at compliance, sorry audit figures, you can look at audit statistics, you can look at heat rate, you can look at surveys about taxpayer happiness. So there’s a whole host of other things you can look at to see whether I indeed hit the hammer on, from my advantage point we are not optimally organised and in fact we are at sub, by far sub optimal organised.’

[27] But perhaps most significant was the devastating consequence for employees, which I describe presently.

[28] The significance of the fragmenting of the organisation, is that it affected not only efficiency, but served also to break down elements of governance. What had existed before were units and divisions capable of having oversight of all steps in the tax collection process, and having an overall view of a taxpayer, or taxpayers in a particular industry, in that they were dealt with end-to-end. The units in the LBC had all the expertise readily to hand to give the unit as a whole an overview of taxpayers and industries. The enforcement units could see the whole picture, and not only snapshots.

That was an important element of governance in a tax collection agency, that calls for inherent checks.

[29] The fragmentation brought about by the restructuring inevitably weakened oversight of decision making in the various functions, with detrimental consequences both to efficient tax collection, and to governance. The same can be said of the effect on governance of the moratorium on the modernisation programme, which I come to next.

[30] We recommend that the Compliance Unit be re-established, and that a high -level Integrity Unit be established on at least the level of seniority and importance that existed before.

CHAPTER 5: INFORMATION TECHNOLOGY AND THE GARTNER CONTRACTS

[1] SARS is an information technology driven business. Information technology plays not merely a supporting role, as it might do in other government bodies, but enables its core business. Secondly, SARS needs to be linked to the digital economy if it is to fulfil its mandate effectively. It cannot be permitted to fall behind, and should ideally be ahead of developments in the digital economy. Information technology skills in support functions, while they have their role, are not sufficient to maintain and develop SARS core systems.

[2] At the commencement of the period under inquiry SARS had an effective and world-class IT division. Technology was central to the Modernisation Programme and the driving force behind many of the achievements up to that time. SARS IT worked closely with the Modernisation Programme Office, and with a generous budget, and dedicated people, had the capacity and capability to quickly and efficiently initiate and complete projects within the Modernisation Programme. The division was led by a ‘core team’ headed by Mr Hore.

[3] Technology was at the heart of the Modernisation Programme, and its successes are well-documented. Mr Artwell Kunene, Executive: Business Relations in DIST, said that at that point ‘IT was a lifeline to SARS. SARS lived and thought IT. IT was central to everything.’ According to the evidence, operating at that high level was attributable to

The skills and experience of the staff;

The dedication and commitment of these staff which meant additional hours and taking on work not strictly within one’s job description to ensure things got done;

A substantial budget;

Strong leadership;

A clear sense of direction and sense of higher purpose.

[4] This success was highly dependent on the particular individuals at SARS at the time – most importantly, Mr Hore, who aggressively drove the agenda. It is unlikely that this period of productivity and advancement would have been sustained indefinitely, nor is it likely to be repeated at that pace now that Mr Hore and some of his team have left SARS.

[5] Before his departure in January 2015 Mr Hore prepared extensive Handover Notes that give some insight into the direction and future of the Modernisation Programme:

1. The Modernisation Programme was to run in three phases. The initial phase required SARS to create capacity, design the programme in detail and prepare the organisation for modernisation. In the next phase, SARS would implement the new business model throughout the organisation. The final phase of the Modernisation Programme was the delivery of world-class technology-driven services to support SARS’ new business model.1

2. The Modernisation summary states “SARS anticipates further benefits with the Modernisation Programme in the next few years. These will be achieved by overhauling the systems and processes yet to be addressed by the modernisation programme, refining the innovations already implemented and introducing further new services and facilities.”

[1 Driving strategic change at SARS the modernization journey 2007 to 2013.]

[6] The modernisation programme applied advanced technology and systems to enable SARS to implement a business model that incorporates sophisticated risk management and the promotion of voluntary tax and customs compliance. It aimed to deliver performance improvements in three areas: Service; enforcement and compliance; and cost efficiency.

[7] The Executive Summary states that the main thrust of the Modernisation Programme was due to be completed in 2015, but cautioned:

However SARS must ensure that the technology infrastructure implemented as part of the programme and the many automated systems and processes it supports do not become obsolete. In order to maximise returns on its extensive investment in technology and maintain high levels of performance SARS will need to continue upgrading and refining its operations. Advances in technology that could help SARS better meet its mandate will need to be investigated and where suitable integrated into the organisation’s operations. Furthermore, errant taxpayers and traders are becoming increasingly sophisticated in their efforts to evade tax and customs legislation. SARS must keep abreast of the latest international trends in countering such developments.”

The Modernisation Programme is likely to be succeeded by a constant but gradual evolution of SARS technology, systems and processes in order to keep pace with local needs and international trends. SARS will, however, always measure future investments in technology against the benefits they will provide the organisation as it strives to better meet its mandate to collect tax and customs revenue, ensure compliance to tax and customs legislation, facilitate trade and secure South Africa’s borders’.

[8] In September 2014, Acting Commissioner Ivan Pillay informed SARS via a Newsflash that EXCO had:

‘approved the SARS modernisation programme comprising 25 projects, of which 8 are legally mandatory projects and 3 are collaborations with other government agencies. The list of projects under modernisation is now the baseline and may only be amended with EXCO’s approval. EXCO will review progress on the projects regularly. Several projects could not be accommodated within the current programme. The Programme Management Office will maintain a list of the proposed projects to plan for their implementation.”

[9] Three months later, after Mr Moyane arrived, without even consulting Mr Hore, he informed all employees in an internal communication, that

‘In order for me to understand the status of the organisation, its processes, practices and the technology we use to accomplish our mandate, I require a comprehensive review of the organisation. In this regard, I have decided to seek the advisory services of external service providers with the necessary expertise and resources to conduct an independent review of the SARS Operating Model, Structure and its Modernisation Programme… Because of this decision, I have put a moratorium on the rollout of further modernisation releases, until the completion of the review of the Operating Model. The exceptions being a few critical releases …’

[10] If taken at face value it is extraordinary that a modernisation programme that had cost billions should be stopped in its tracks only because Mr Moyane wanted to understand it. Had he genuinely wanted an understanding he could have sat down with Mr Hore.

[11] As yet there is no meaningful policy, programme or strategy for the role of technology in SARS. This lack of direction has been exacerbated by the division being without a Chief Officer for almost a year after the re-structure. The Chief Officer: Digital Information Services and Technology (DIST), Ms Mmamathe Makhekhe-Mokhuane, appointed in early 2017, has been seemingly unable to provide direction.

[12] According to her own evidence DIST currently operates only to ‘keep the lights on’ and without any new or focussed innovation. While she spoke in her evidence of many matters that needed ‘talking about’, we were not able to discern any strategy, or any real prospect that DIST will come to terms with, and reverse, the heritage of four years of neglect, within the foreseeable future, while information technology remains under her management. We recommend that the new Commissioner of SARS recruit one or more suitably qualified persons from within or outside SARS to be placed in a position to take control of SARS information technology, and to develop and implement a strategy to renew development of the technology.

[13] In his report for the 2016/17 year, in the chapter on Information Technology Governance, the Auditor-General noted that SARS ‘had not defined the DIST performance criteria for the 2016/17 financial period due to restructuring which affected all the departments and the DIST executive position was still vacant. Furthermore, the initial IT strategic plan was submitted to the executive committee for review and had to be revised.’ He recommended that ‘as a matter of urgency’ the position be filled, that the plan be approved, and that DIST performance criteria for the following financial year be clearly documented ‘to enable SARS to achieve its core mandate’. Apart from the position having been dubiously filled, nothing of that had occurred at the end of the period under inquiry.

[14] SARS is hamstrung by the difficulty of recruiting and retaining skilled IT professionals capable of dealing with the level of technology that exists at SARS, and to effectively procure the hardware and software needed to fulfil its mandate. It appears that these difficulties are not insurmountable, but require decisive and experienced leadership, which at present SARS does not have.

[15] I observed elsewhere in this report that Bain had recommended a year before that there be an IT review. An Irish enterprise called Gartner was brought in for that purpose. Gartner conducts information technology research, which it makes available to clients on subscription. A smaller part of its business is to provide consultancy services. SARS has subscribed to its research service for some years and still does so.

[16] Until 2016 Gartner did not have a presence in South Africa, and was represented by a sales agent. If it secured consultancy business it would contract the work t independent consultants. While the contract to provide its consultancy services in this case was between Gartner and SARS, delivery of the services was to be made by its sales agent.

[17] Mr Willemse, employed by the sales agent, represented Gartner in the early discussions that led to its appointment, and in the execution or the various contracts. Mr Willemse knew Mr Patrick Monyeki, professionally, who is well-grounded in information technology. Mr Monyeki is also an acquaintance of Mr Moyane. I have also drawn attention in chapter 4 to an email indicating that a meeting was arranged to take place at the offices of Bain, to be attended by Mr Monyeki and Mr Moyane, amongst others, on 24 September 2014.

[18] Mr Willemse said he was approached by Mr Monyeki who told him a new Commissioner had been appointed at SARS, who had ‘identified various issues’ relating to its modernisation programme that needed attention. One was whether the SARS strategy was aligned with and supported its business strategy. Another was concern as to whether the expenditure incurred in the modernisation process had yielded the return on investment that SARS anticipated. We think it is also clear from a report produced by Gartner that it was also asked to investigate whether there had been irregularities in the procurement process in the course of that modernisation programme.

[19] Mr Willemse said he did not know what Mr Monyeki’s relationship was with SARS, nor in what capacity he was acting, nor did he ever ask. We regret we are sceptical of that evidence. Mr Willemse said he was told by Mr Monyeki that SARS had identified Gartner as the organisation to undertake the project, and he was asked to provide input for the development of terms of reference, being the mandate that would be given to Gartner. In anticipation of the meeting, which occurred on 10 December 2014, he had received an email from Mr Monyeki:

‘Attached please find some of the thoughts I captured when interacting with the client. Can we perhaps please try and clean up and enhance these terms of reference so that we have a complete TOR for tomorrow’s meeting with the client’

I’m available on the phone throughout the day to discuss your thoughts on this. Also if you do not have enough time today please send me some draft I strategy review rfp’s which we can then amend. ‘.

[20] The terms of reference were written in collaboration between Mr Willemse and Mr Monyeki. For a time in his evidence Mr Willemse said he considered this was to be a ‘sole source’ contract, and sought to justify writing the terms of reference on that basis. The ground upon which he contended Gartner was a ‘sole supplier’ was that Gartner was the only consultancy not tied in some way to another supplier of goods or services. That quality is of no significance. It is a consideration that might be taken account of when determining which supplier to choose, but as Mr Willemse conceded on closer examination, Gartner was the not the sole supplier of the services that were required.

[21] There are obvious risks in a potential supplier writing its own terms of reference. The first is that it might write the terms such that they favour its appointment. Another risk is that the supplier might tailor the terms of reference such that it would be appointed for further work.

[22] In this case the initial contract was to conduct a review of the modernisation programme (Phase 1), which Gartner ultimately did at a cost of approximately R12 million. However, it then secured a further contract (Phase 2) which earned it another R144 461 000. This was followed by additional contacts – the GRAP implementation that cost R9.8 million and the Star assessment that cost R8.7 million.

[23] Mr Willemse said he had no expectation of further work after phase 1, although he accepted that reviews of that kind could often lead to further work. An email written by him to Mr Monyeki on 11 December 2014 suggests the contrary:

‘Hi Patrick. I’ve changed the outcomes slightly. My suggestion would be that the approach we would follow is to

– Gather strategic and business requirements

– Perform IT assessment

– Analyse current state findings

– develop future state recommendations

– develop roadmap and associated initiatives

– deliver final report and presentation to the Commissioner

Coming out of the roadmap will be additional initiatives that we could assist them with so the first phase is really the review and the recommendations via the roadmap.’ [my emphasis].

[24] Mr Willemse said SARS asked Gartner to subcontract part of the work to a company from their preferred list to ‘ensure adherence to their empowerment policies’. At first Garner was reluctant to do so but on 9 January 2015 Gartner received an email from SARS to the effect that Mr Makwakwa had asked for additional requirements. Mr Willemse said at that point he realised that Gartner did not have sufficient people to do the additional work. Knowing that Mr Monyeki’s company, Rangewave, had access to consultants on contract, he asked Mr Monyeki if he could use their services.

[25] The explanation for subcontracting part of the work to Gartner was fallacious in two respects. Mr Michael Mavuso, who was Acting Senior Manager: ICT at the time, testified that SARS never had a preferred list of empowerment partners. He also said that, since Gartner’s South African agent was a level 1 BEE company, there was no need for it to subcontract to an empowerment partner.

[26] The persons concerned were duly contracted by Rangewave to do the work, for which Rangewave received portion of the fee charged by Gartner. Whether that was 30% or 40% is not clear. It appears that no written contract was concluded between Gartner and Rangewave.

[27] Mr Lithgow was employed by Gartner, but was located abroad. He said his role in the project was threefold. He was the senior executive accountable to SARS for delivering the work. He was accountable to Gartner for running the project on ethical lines in line with the contractual arrangements. And he facilitated the gathering of information from within the organisation that supported tax administrations.

[28] He had no direct involvement in the procurement of the contract, but on 13 January 2015, after a phone call from Mr Willemse, he wrote an email to others in the organisation saying:

‘All – we have been asked to bid for a piece of work in S Africa Revenue – Tax Office. We have been discussing this since 17th December and Paul Turton has been involved in reviewing the approach and SoW. IT is an IT Review and Modernisation programme. The total value is around

$1m and it will sign in late January or early February.

There is an issue that needs your input. S Africa have a policy of Black Empowerment. This means that a company has to demonstrate that it is providing opportunities to black majority population. Unless we can demonstrate this it means that our bid can be vetoed.

The client has proposed that we use a small company that is led by an ex Government CIO whom Neville knows. This would add the necessary ‘proportion’ of Black Empowerment. The impact on us would be a 70/30 split ($700kGartner/$300k partner) – 70% of the work by Gartner and the remainder by the partner. Neville has vetted them and he is content that they are qualified to do the work.

The question is how we contract with them and recognise revenue. We are not able to mark‐up

– would make the engagement uneconomical for client. It is a similar situation as Stockholm Stad where the client insisted that in order for us to have the work we had to use a specific partner.

The suggestion from Neville is that their revenue/invoicing is treated as BIPT with a mark‐up of 5%‐10% for managerial fees. But I suspect we would not be able to recognise as revenue – not sure if this is important given that it will be detrimental to margin.

Stephen – as they are a Sales Agent I am not sure how involved we are in the sub‐contractor arrangement?

The client is showing signs of work starting in the next 10 days so there is some urgency in addressing this issue.

Mike’.

[29] In his evidence Mr Lithgow said he did not understand that the appointment of Rangewave was a condition for Gartner to be awarded the contract, but acknowledged that that was contradicted by his email, which had been written shortly after a telephone conversation with Mr Willemse. Explaining what he meant by a contradiction, he said ‘my contradiction is that I cannot confirm that the client directly proposed that we should use Rangewave’, which does not seem to us to be a contradiction at all. It merely conveys that he has no direct knowledge of whether that occurred. However, we think it is clear from what was reported to him by Mr Willemse that appointment of Rangewave to a share of the contract was a condition for Gartner’s appointment, which was the ‘empowerment’ partner referred to in the email. We see no reason why we should not accept the contents of the email at face value, which is a contemporaneous record, and which also accords with the probabilities. Given the detailed terms of the email, it is difficult to see what Mr Lithgow could have misunderstood what he was told by Mr Willemse, which he speculated he might have done.

[30] There have been criticisms of the work performed by Gartner, and justifications advanced in return. Whatever its quality it turned out to be largely worthless because it was never implemented by SARS. Mr Lithgow had concerns during the course of the contract that Gartner’s recommendations were not being implemented, and raised them with Mr Moyane, whose response was that he would resolve his concerns, but the concerns continued. An extract from the evidence of Mr Lithgow gives a general picture of what occurred as he saw it:

‘And, you know, I accept that we completely failed because from what we’ve heard this week, you know, nothing any longer exists of what we’d done and nothing has been implemented which to me professionally is genuinely distressing.

We have a vast repository of the work that we have done. My confidence that even 10% of that can now be found is low. Now, do you blame us or do you blame somebody else? I don’t know who you blame but what I am saying is that we have, I ‘ve had a team of – I had people crying on the phone having been contacted not about this Commission but now having an understanding that the amount of effort and commitment that they made and generally with the people in SARS and I know we’ve heard a lot of people who say were weren’t happy with Gartner etcetera and everybody has their own right and I’m sure there’s a lot of people along those lines.

All I can say is the people we worked with were desperate to make things better. They were proud of the organisation they were part of and they enthusiastically wanted to embrace change. And there is a sense that that has not happened. So you could say so okay, Mike, so this R200 million that we spent on you is completely wasted. You know, or you have not delivered us value for money whoever way you term it. And I’d answer in two ways.

Can I justify the money that [was] spent? Yes, I can justify can justify that and I think we did that through various avenues. Has it delivered value for money for SARS? And my answer in a very clear manner is no, because we have not seen any evidence or significant evidence of the work that we’ve done has now occurred. Now there may be bits and pieces in place.

In some ways that’s even worse because what’s happened is bits of the organisation have moved forward but other bits have not so actually you’ve now got a really confused situation because now nobody knows what is happening. You know, have we changed or have we not changed? Are we going to change? So yes, as a professional I am upset but the effort that we put into this may not have delivered what all parties had hoped for.’

[31] So far as it is suggested that SARS was altogether to blame for non- implementation of Gartner’s proposals, we don’t think that is the case. For example, Gartner recommended that the call centre systems (custom-built for SARS) be replaced to allow for extra digital channels such as web chat etc. As part of Phase II, Gartner was contracted to do six tasks on the Customer Service Project Stream. The quoted fee was approximately R7 million. A Request for Proposals was never issued for this work because the proposed solution was too expensive, which Gartner acknowledged in its project completion report: ‘The key challenge experienced during this project was the lack of funds in order to go ahead with the procurement of the Omni-Channel solution in 2016. Moreover, no one consulted with Ms Sallie about whether Gartner should be contracted to do the Phase II work – including the drafting of the RFP. It was work that was completed, but ultimately added no value for SARS as it was impractical and could never be implemented.

[32] We do not think any real purpose is served by attempting to make findings on the quality of or necessity for work that was done by Gartner, on which there are differences of opinion even within SARS. Suffice to say the work turned out to be largely useless, and large expenditure wasted, because it was never meaningfully implemented. No doubt a contributor to that was SARS itself, though as I have indicated, we do not think it can all be laid at the door of SARS.

[33] What is concerning however, is that whatever its ignorance at the outset, Gartner must have become aware that the work it was doing was not adding value to SARS. I have pointed out that in his evidence Mr Lithgow posed the question: ‘Has it delivered value for money for SARS?’, to which his answer was: ‘in a very clear manner is no’, which leads one inevitably to the further question: Why, then, did Gartner, without question, simply continue doing useless work? We do not think in a public institution, consultants should be simply doing what they are told, without evaluation of what they have been asked to do. In our view they have a professional responsibility to the public, which is paying for its work, to question the integrity of the instructions they receive where a red flag goes up, as it did in this case.

[34] More concerning, however, is the manner in which the contracts were secured, which did not follow the ordinarily required competitive procurement process. Even Mr Lithgow acknowledged a number of unusual features. It was unusual for Gartner, he accepted, to settle the terms of reference with a third party without knowledge of his or her mandate and why he or she was involved at all. He would have been ‘cautious and asked more questions’ on the relationship between Gartner and SARS and Rangewave, had he known Mr Monyeki had been the person who had engaged in drawing the terms of reference. He was surprised that phase 2 did not go out to the market, bearing in mind its size.

[35] SARS itself was aware that the procurement process in respect of Phase 1 was irregular. On 10 July 2015, Ms Mogogodi Dioka, then Procurement Executive, sent a memorandum to the Commissioner asking for condonation in respect of Phase 1.

Condonation is a procedure required by Treasury when a public entity becomes aware that one of its procurement processes is unlawful. The chief accounting officer is required to condone the irregularity and report it to the Treasury.

[36] Mr Moyane approved the condonation on 13 July 2015 and asked the Chief Financial Officer to investigate what had happened. Notwithstanding that Mr Makwakwa was the project sponsor and drove the procurement process, the investigation resulted in Ms Dioka losing her job and Mr Mavuso being disciplined.

[37] At the time Mr Moyane condoned Phase 1, SARS contracted Gartner for Phase 2. SARS’ national adjudication committee met on 8 and 14 July 2015 to discuss a request to deviate from a competitive procurement process in terms of Treasury Regulation 16A.6.4 and award Gartner an implementation project for a two-year period at a cost of some R144 million. The justification advanced for deviation was that the IT review was urgent because SARS had to ensure that ‘the IT review was aligned with and synchronised to the process of designing the new SARS operating model’ that Bain was undertaking. Gartner’s Phase 1 work meant they were poised to undertake Phase 2 quickly. On that basis, the national adjudication committee supported the deviation and Mr Moyane approved it on 20 July 2015.

[38] This was an improper use of the deviation process. In the first place, and as Mr Tshitangano of National Treasury said in his testimony about SARS’ procurement of Gartner’s services, the type of urgency contemplated by 16A6.6 is an emergency situation where lives are at risk. Secondly, the national adjudication committee had approved contracting Gartner without a competitive (or any) procurement process for Phase 1 on the basis that Phase 2 would be put to market. They then used the fact of Gartner’s involvement in Phase I to justify the deviation for Phase 2.

[39] We were not at all impressed by the evidence of Mr Willemse, who prevaricated and avoided direct answers to questions. We are also sceptical of his evidence that he had no knowledge of Mr Monyeki’s relationship with SARS, but if that is indeed true, he should have ensured that he did know. We also think it most improbable that the apportionment to Rangewave of some of the work was coincidental and had nothing to do with Mr Monyeki’s relationship with SARS.

[40] We think it is probable that Mr Willemse was well aware that the ordinary competitive procurement process was being unlawfully bypassed. He said at first that he understood competitive bidding not to be required because Gartner was a ‘sole supplier’, which allowed for departure from that process, but that explanation could inevitably not be sustained, and we consider it to have been disingenuous. Ultimately he accepted that Gartner was not the only party who could offer the service, but then resorted to protesting ignorance of the proper process for procurement.

[41] The initiation by Mr Monyeki of drawing the terms of reference, the absence of explanation of his role, the haste in which the contract was procured, the departure from the ordinary procurement process, when there is no apparent reason why the contract was urgent and Gartner was not a sole supplier, the notification to Mr Lithgow that appointment of Rangewave was a condition for Gartner to secure the contract, the doubtful explanation by Mr Willemse for appointing Rangewave, together raise serious questions of what was occurring.

[42] In our view the transaction warrants inquiry by SARS as to whether it considers the process of procurement to have been unlawful, in which case it ought to consider whether to have the contract declared void. What consequences there would be if the contract is found to be unlawful is not a matter for the Commission to consider. We recommend that SARS considers commencing proceedings to set aside the contracts and to recover expenditure incurred that added no value to SARS.

[43] There is another aspect of the IT review that bears mention. Part of Gartner’s mandate in Phase 1 was to review SARS’ procurement processes during modernisation.

The contemporaneous emails between SARS, Mr Willemse and Mr Monyeki show that Mr Makwakwa expanded the terms of reference for Phase 1 to include this review. Gartner found no notable irregularity in Mr Hore’s procurement processes, whereupon SARS contracted Grant Thornton in mid-2016 to undertake ‘Project Lion’ at a cost of some R12.5 million. The scope of Project Lion was to conduct a preliminary forensic investigation into the expenditure related to the procurement of goods and services for the SARS Modernisation and Technology projects from 2017 to 2014, and to establish whether the SARS modernisation programme had delivered value for money.

[44] Grant Thornton delivered their report on 19 December 2016. The report is inconclusive and merely recommends that ‘a further investigation be considered by SARS’. SARS accepted the recommendation and wrote to National Treasury on 30 August 2017 to seek approval to deviate from a competitive procurement process to appoint Grant Thornton to render Phase II of Project Lion at an estimated cost of R50 million. National Treasury declined the request on 18 September 2017. On 6 April 2018 the acting Group Executive for Procurement retracted SARS’s request for deviation for the appointment of Grant Thornton for phase II of Project Lion.

[45] It all indicates that Mr Moyane was intent on unearthing fault with the procurement of goods and services for the SARS modernisation process. Some R12.5 million and more was spent on doing so in Phase 1 and Project Lion. With little to show for the money Mr Moyane had in mind spending a further R50 million on phase II of Project Lion, which was prevented only by National Treasury’s intervention. Meanwhile, developing the core systems was on hold.

[46] We have said elsewhere that information technology has inbuilt checks that serve an important governance function, which it is essential to restore.

The next part of the report can be read here.

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