International consultancy firm Bain & Company came under fire at the Nugent Inquiry into tax administration and governance at the South African Revenue Service (Sars) on Thursday because it didn’t raise red flags when it won contracts worth R164 million despite the absence of a competitive tender process.
Bain was instrumental in the development of a new operating model for Sars. Many witnesses have previously testified that the new operating model was responsible for a lot of the turmoil Sars experienced in recent years.
Evidence leader Carol Steinberg explained that as part of the planned overhaul, a request for proposals (RFP) was initially put out to provide Sars with a “diagnostic”. Minutes from two exco meetings show that Bain was appointed because its proposal was the cheapest. The consultancy offered a 50% discount, which reduced the cost from R4.76 million to R2.38 million.
Sars planned to put out another RFP after the diagnostic was completed to take the process to the next level, but this didn’t happen. Instead, Bain’s initial contract was extended twice and ended up costing taxpayers R164 million.
Vittorio Massone, managing partner at Bain & Company, explained that it is a normal practice to offer a discount when working with a new client. He argued that the value of the discount was more important than the percentage and that it was quite small in this instance.
Although Bain initially indicated that any further work would be done at the full price, it was later decided to also offer discounts for follow up work, albeit lower than the initial 50%.
However, Sars exco minutes suggest that it did not return to the market for the follow-up work because it believed Bain would offer the same discount going forward. Massone said this was not the case, as it would not have been sustainable.
The discounts that were finally offered were 12% in 2015, 19% in 2016 and 26% in 2017. Sars paid the lowest fees charged by Bain for this type of work in the South African market, Massone said.
Steinberg explained that in terms of South African procurement laws, it was highly irregular to tender for something that cost just over R2 million and end up with a contract for R164 million.
Massone said to familiarise himself with local procurement laws, he spent two hours with two lawyers from a prestigious law firm in 2013, but the meeting left him none the wiser.
“I want to believe we were respecting the laws of the country on our side.”
Asked whether the tender process did not raise any red flags for Bain, Massone said they were asked to keep the information on hold and thought that Sars was going through the necessary processes.
Judge Robert Nugent asked whether Bain did not find it rather odd to allow a discount of 50% for a diagnostic, which put them below the next cheapest bidder, but to then charge much higher fees than other bidders for the remainder of the project?
“What you’ve got is a discount that gets you the job and full rates that are going to apply for the rest of the job,” Nugent summarised.
But Massone said although additional work was a possibility, it was not a given.
However, Nugent said generally the person who diagnoses the problem also fixes it.
“So when you are doing the initial tender you are fully aware that you are going to be charging double for the rest of the work. Is that correct?” Nugent asked.
“Yes,” Massone replied.
Massone argued that one of the main reasons they received the tender was due to the references they provided – which spoke to quality – and not only because of the price they charged.
“Well, it may not have been all on price, but the fact of the matter is you came in just below the next tender with a 50% discount, but you are expecting to get the job and then double the price,” Nugent said.
Steinberg referred to testimony at the State Capture Inquiry last week, where acting chief procurement officer Willie Mathebula indicated that arguments that a deviation (an emergency with a contract for example) didn’t allow a government department to go out to tender was one of the primary mechanisms for corruption in South Africa in the last ten years.
“This is an example of a deviation – a huge one. It is exacerbated by the fact that the initial tender was won on the basis of a 50% discount that gets you in the door. But then going forward, not only is there not a competitive tender, but the initial price has doubled actually. That is an example of what the chief procurement officer was talking about and it is a grave concern to this country, given the corruption,” Steinberg said.
Asked what the responsibility of an international company was that worked in the public sector in an environment where there was a high risk of corruption, Massone said he couldn’t answer the question.