Manase Report H2O Networks-Subban Irregularities

KwaZuIu-NataI ProvinciaI Government Forensic Investigation Report
Department of Co-operative Governance eThekwini MetropoIitan MunicipaIity

and TraditionaI Affairs 25 January 2012

Manase & Associates Strictly Confidential Page 352
SECTION H

INVESTIGATION OF CONTRACTS AWARDED TO H2O NETWORKS
SOUTH AFRICA (PTY) LIMITED

Three awards were made to H2O Networks (South Africa) (Pty) Limited; the first
two were Section 36 awards, whiIst the third was made through the pubIic
tender system.
Prima facie evidence exists that the two Section 36 awards made by the Head:
GIPO were irreguIar, in that the awards did not compIy with the requirements of
the SCM poIicies of the MunicipaIity.

FIRST AWARD
The first award amounting to R293 575.00, which was a Pilot Project for the
laying of 1, 25 km of cable, was irregular as it contravened the following:

i Paragraph 13 (a) of the SCM poIicy. H2O was awarded work on 30 January
2009 yet they did not have a vaIid tax cIearance certificate; which they onIy
obtained on 30 June 2009. Paragraph 13 (a) prohibits the consideration of a
bid where the bidder has not provided a tax cIearance certificate from South
African Revenue Service which proves that the providers tax matters are in
order.
i Paragraph 13 (b) of the SCM PoIicy. Martin CeIe and Ray Dhavraj, former
consuItant and empIoyee respectiveIy of GIPO, both of whom previousIy
reported directIy to Ms. Subban, are invoIved in the management of H2O.
H2O was awarded the PiIot Project within eight months of Dhavraj resigning
from the MunicipaIity, in contravention of the paragraph 13 (b) of the SCM

which requires that a bid from a company may not be considered in these
circumstances for a period of 12 months subsequent to such resignation .
i Paragraph 14 (4) of the SCM poIicy. At the time of the award of the section 36
appIication dated 30 January 2009, H2O Networks (Pty) Ltd. had not been
registered on the suppIiers database. It was onIy registered on 2 JuIy 2010.
Paragraph 14 (4) of the SCM poIicy states No bids or quotations may be
solicited from any supplier/service provider/contractor who is not registered
and verified by the appropriate branch on the Procurement Units Supplier
Database, or is in a position to be so before the award.

SECOND AWARD
The second award amounting to R 27, 4 million and styled as Extended Pilot
by GIPO was irregular as:

i The vendor enjoyed undue preference in that the contract was drafted by
H2O Networks, was not independentIy reviewed and did not protect the
interests of the MunicipaIity.
i H2O did not provide the required surety bond of R2 737 793,00 in respect of
the second award and no one from SCM or GIPO foIIowed up to ensure that
the bond was provided as required by the Ietter of award.
i On 22 January 2010 an amount of R15 977 929.92 was paid in advance to
H2O for the extended piIot project. This payment was made before the fibre
couId be Iaid; this payment was made on the very same date that Ms.
Subban signed the contract.
i Section 114 of the MFMA was contravened as this award was not reported to
the AG and NationaI Treasury.

THIRD AWARD
The third award to H2O in the amount of R53 000 000.00, in respect of which
contracts were signed on 9 November 2011, is yet to be comprehensiveIy
investigated.

BACKGROUND
On 8 January 2009 the Geographic Information and Policy Unit (GIPO) prepared a
Report to the Bid Adjudication Committee to seek approval for the appointment of
H2O Networks South Africa by deviating from the Supply Chain Management Policy
by application of section 36 of the policy, on the basis that in May 2008 the
Municipality became aware of technology that was simpler, quicker and subsequently
cheaper to lay fibre optic cable (hereinafter referred to as fibre).

The method uses the Municipalitys own sewer infrastructure to act as tunnels for
laying fibre. H2O Networks (South Africa) (Pty) Limited (H2O) was identified as the
South African supplier of this UK based technology.

A pilot project for the laying of fibre over a 1, 25 km distance at a cost of R282 459.57
was awarded to H2O, based on a quote from H2O dated 12 December 2008. The
basis for using S36 was that H2O Networks South Africa was the only company in the
country that provides this solution, and hence it was a sole supplier. This report was
signed on behalf of GIPO by Dr. Sutcliffe, the City Manager; the document required
that queries should be referred to Ms. Subban, the Head of GIPO. The quote from
H2O is for R293 575.00 instead of R282 459. 57.
ANNEXURE H 1
On 7 October 2009 GIPO prepared a report to BAC motivating that the Pilot Project
should be extended on the basis that the Pilot Project was conducted in the 300 mm
pipe. It was recommended that the pilot be extended to smaller diameter pipes and,

based on the extended pilot, the municipality would consider wider scale adoption of
the technology. The motivation to BAC was signed by Ms. J. Subban (Head of GIPO),
Mr. N Macleod (Head: Water and Sanitation), S Ncgobo (Member: Supply Chain
Management and on behalf of the Deputy City Manager, Mr. K Kumar (by an
unknown signatory).The application was made under S36 on the basis that H2O
South Africa was the only company licensed in South Africa to provide this solution
patented by i3 Group Ltd in the UK (sole supplier). Based on the quote provided by
H2O for a minimum order and installation of 129 km of fibre, the costs associated
would be R24 015 728. 00, excluding VAT. Although funds had not been budgeted
for this expenditure in the 2009/10 financial year, savings would be identified and an
Adjustment Budget would be processed to meet this expenditure. H2Os proposal
was accepted on 11 November 2009, by Mr. A. Petersen (Deputy Head: SCM).

FIRST AWARD
PiIot Project awarded to H2O Networks South Africa through the use of Section
36 of the SCM PoIicy
On 8 January 2009 the GIPO prepared a Report to the Bid Adjudication Committee to
seek approval for the appointment of H2O Networks South Africa by deviating from
the Supply Chain Management Policy by application of section 36 of the policy this
document was signed by was signed by the City Manager, Dr. Sutcliffe and is
enclosed as
ANNEXURE H 1
The Report to the Bid Adjudication Committee contained the following averments:

i GIPO believed that section 36 allows the appointment of service providers without
following the public tender process and quoted the following in support of their
action:

I. 36 (a)(v) in any other exceptional case where it is impractical to follow the
official procurement process;
II. 36 (b) accounting officer can ratify any minor breaches of procurement process
in terms of the procurement process in terms of delegated powers or duties
which are purely technical in nature.
i GIPO motivated that since the initiation of the Municipalitys fibre installation
project in 2004, the project has always sought to find cheaper and more effective
ways of laying fibre to its offices. In May 2008 the Municipality became aware of
technology which was simpler, quicker and subsequently cheaper to lay fibre. This
method uses the Municipalitys own sewer infrastructure to act as tunnels for
laying fibre.
i GIPO contended that whilst the technology has been used before, the method
deployed by H2O (UK) (a UK based company, which has subsequently changed
its name to i3 Group), differs in that it has patented a method to lay fibre at the
bottom of sewer pipes and not clamped onto the piping, as other sewer-in-pipe
technology. Other methods of installing fibre were found to be no less expensive
than the traditional methods, and have therefore not been pursued by GIPO.
i GIPO motivated the need for the pilot project by stating that the technology used
by H2O is unique and whilst it has been tested in the UK, it has not been tested in
South Africa. GIPO further stated that once the pilot was completed and if the
results are successful, the technology would be more fully considered.
i GIPO motivated the price for the pilot project as follows:
Cost comparison on a 1, 25 km distance:
Description MateriaIs and Labour Re- Instatement
Average
TotaI
Traditional R237 500 R437 500 R675 000
Sewer R187 522 R187 522


i GIPO concluded that the cost of deployment using the sewer method is potentially
70% less than traditional methods over the same distance. It anticipated that an
additional R70 000.00 would be incurred during the pilot phase to cover the costs
of supervisory engineers, labour, travel and accommodation.
i GIPO calculated the total cost to be incurred at R293 575.00 including VAT and
recommended that the City Manager be granted authority to appoint H2O
Networks South Africa as a preferred service provider for the purpose of
conducting the pilot project for the amount of R293 575.00 including VAT.
i The letter of award from the Municipality to H2O of the Pilot Project, dated 30
January 2009, and signed by Ms. J Subban is enclosed as
ANNEXURE H 2

INVESTIGATION OF AWARDS MADE TO H2O NETWORKS BY THE INTERNAL
AUDIT UNIT
i The Municipal Public Accounts Committee (MPAC) had instructed the Internal
Audit Unit to undertake audits on all contracts/purchases made under Section 36
of the SCM policy. The Internal Audit Unit selected the contract awarded to H2O
Networks South Africa (Pty) Limited (H2O), administered by the Geographic and
Policy Unit (GIPO).
i Internal Audit raised a number of concerns that it regarded as serious and noted
on the failure of management to comply with Supply Chain Management policy
and the transgression of the Municipal Finance Management Act (MFMA). Its
report is attached as
ANNEXURE H 3

i As at 04 August 2011 Internal Audits Final Draft Report had not been finalised.

i Internal Audits findings on the Pilot and Extended Projects included the
following (the investigating teams submission also refer):

InternaI Audit Units Findings on the PiIot Project
InternaI Audit Findings Investigating Teams Submission
1 At the time of the award of the section
36 application dated 30 January 2009,
H2O Networks (Pty) Ltd. had not been
registered on the suppliers database. It
was only registered on 2 July 2010.
This assertion is borne out by the letter from
Ms. S Deen from eThekwini Municipality,
dated 26 June 2009, where she states that
H2O is not registered on the database and
she was thus unable to effect payment. It was
her second request for the company to effect
registration.
Attached ANNEXURE H 4
Non registration of H2O on the database
precludes its bid being considered, hence,
the award was made irregularly.
2 It was not clear how the Municipality
became aware of H2O as they were not
registered on the database at the time
of awarding the work.
It would appear that the relationship with the
previous employee and consultant at GIPO,
viz. Messrs R. Dhavraj and MS Cele
respectively, may have unduly influenced the
award of this contract to H2O.
3 H2O was awarded work on the letter
dated 30 January 2009 yet they did not
have a valid tax clearance certificate;
which they only obtained on 30 June
2009.

Its bid or submission should not have
The investigating team concurs with this
conclusion that their bid/submission should
not have been awarded work (or even be
considered) until their tax clearance
certificate was submitted to the Municipality,
as Section 13 of the SCM policy was
contravened. Section 13 of the SCM policy

been considered until its tax clearance
certificate was submitted to the
Municipality.
provides:
A written quotation or bid may not be
considered unless the provider who
submitted the quotation or bid has furnished
a tax clearance certificate from the South
African Revenue Services which proves that
the providers tax matters are in order.

The tax clearance certificate dated 30 June
2009 is attached as
ANNEXURE H 5
Section 13 of the SCM policy was therefore
not complied with when the award was made.

InternaI Audit Units Findings on the Extended PiIot Project (Second Award)
InternaI Audit Findings Investigating Teams Submission
1 Regulatory provisions i.e. lack of
evidence that the 10% surety was
provided to the Municipality on the
second award.
The motivation by GIPO to the Bid
Adjudication Committee for the second S36
award to H2O is enclosed as
ANNEXURE H 6
The letter of award to H2O from SCM for the
Extended Pilot is enclosed as
ANNEXURE H 7
and requires a surety bond in the amount of
R2 737 793. 00 to be provided by H2O.

SCM have confirmed that the surety ship
bond of R2 737 793, 00 was not received,
ANNEXURE H 8
again confirming unfair preference for this
contractor.

2 Mr. RS Dhavraj had resigned from the
Municipalitys employ on 31 March
2008, quotations or bids from H2O
should not have been considered for
12 months as he was a stakeholder in
terms of the Municipalitys policies.
finding. Section 13 of the SCM policy
provides A written quotation or bid may not
be considered unless the provider who
provided the quotation or bid has indicated if
the provider is not a natural person, whether
any of its directors, managers, principal
shareholders or stakeholder is in the service
of the State, or has been in the service of the
State in the previous twelve months. In the
event that the declaration is made and the
quotation or bid is still awarded, Section 45
prescribes how the award should be reflected
in the Annual Financial Statements if the
award is for more than R2 000.
Ms. Subban has confirmed that she was not
aware of this requirement as reported
elsewhere in this report.
3 There was no evidence of H2O being
involved in similar contracts. The Head
of GIPO confirmed that the company
was newly formed to exploit the
technology. The manner of the award
of the pilot and extended project was
questionable.
The investigating team concurs. This
company appears to have been formed
specifically for this project, as it had not
previously traded.
4 H2O was created solely to undertake
the works on the pilot project and
subsequent contract/s to the exclusion
of other competent contractors.
assertion. The company was also given
undue preference, which may not have
ordinarily have been extended to a company
dealing at arms length. This issue is
discussed elsewhere in this report. The
charge that other competent contractors
could have been avoided if the Pilot Project

was put on public tender and H2O then won
the contract in terms of their submission.
5 H2O is sharing resources with Data
World and Accounts Manager (Speedy
Govender), sharing e-mail facility with
Xteam Technology. These entities are
in the same line of business, thus H2O
is not deemed to be an independent
enterprise.
This finding is confirmed in the Assessment
of H2O Networks by the Procurement
Monitoring Branch. The report states The
physical location of the enterprise is 1
Kingsmead Boulevard, Durban. The
enterprise sub-leases the premises from Data
World (Pty) Ltd. The assessment has
revealed that the two entities share office
facilities and are involved in the Information
Technology field Procurement Monitoring
would like to report that the independence of
H2O could not be guaranteed. This report is
attached
ANNEXURE H 9
6 The Section 36 application dated 7
October 2009 clause 2.3 states... H2O
Networks have however agreed to
price the technology on a partitioned
ownership basis (85% - 15%) in favour
of the Municipality). The Municipality
has paid for the fibre optic cable;
therefore full ownership should vest
with it. It appears that the interest of
the Municipality has not been
adequately protected.
finding. Our detailed finding in this regard is
provided elsewhere in this report. The
contract for the second award to H2O is
enclosed as
ANNEXURE H 10

The municipalitys legal department reviewed
this contract in March 2011 and their report is
attached as
ANNEXURE H 11
In paragraph 7 of their report they state: This
is a rather bizarre provision and they state
that the contract contravenes Section 47 (a)
the MFMA.
7 No invitations were extended to fibre
optic cable layers in the market in
finding. Undue preference appears to have

order to establish the number of
service providers capable of installing
the said cable.
been afforded to this entity.
The Assessment of H2O Networks by the
Procurement Monitoring Branch concludes
H2O Networks SA does not comply with
the requirements needed to qualify as Priority
Business Enterprise (PBE), Black Business
Enterprise (BBE) and Small, Medium, Micro
Enterprise (SMME) in terms of the Targeted
Procurement Policy.
ANNEXURE H 9
It is therefore unfortunate that other potential
service providers, who may have complied
with the Targeted Procurement Policy, were
not given the opportunity to compete.
8 The extension contract in the sum of
R24 million (excluding VAT) has been
made using the Section 36 route of the
bidding process. In this regard it must
be noted that the contract cannot be
regarded as an extension of the
original contract.
The second award, using the Section 36
route, compounds the impression that this
company was given undue preference, as
stated elsewhere in this report.
9 There is no evidence of a bid
specification being prepared for the
project in an unbiased manner.
The investigating team concurs.
10 There is no evidence of allowing all
potential suppliers to offer their goods
and services irrespective of the
procurement process to be followed.
11 The contract has not been referred to
Legal Services; hence the
Municipalitys interests have been
compromised.
Legal Services eventually provided an
opinion in March 2011, which confirms that
the municipalitys interests have been
compromised.
12 The Municipality paid R16 million There is prima facie evidence that this

directly to H2O Networks South Africa
for the procurement of fibre optic cable
from H2O International for work not yet
started. H2O Networks South Africas
invoice was supported by the bill of
lading raised in Southampton.
payment is irregular. This aspect is dealt with
elsewhere in this report.
13 The value of the two contracts
irregularly awarded amounted to
R27 671 507.20.
Agreed. Dealt with elsewhere in this report.
14 The Internal Audit report stated that
based on the work performed, it was
concluded that management has not
complied with SCM policy and MFMA
and that work had been irregularly
been awarded to H2O Networks South
Africa.

SECOND AWARD
Extended PiIot Contract awarded to H2O Networks South Africa
On 7 October 2009 GIPO prepared a report to the Bid Adjudication Committee to
seek approval for the appointment of H2O Networks South Africa by deviating from
the SCM policy by application of Section 36 of the policy. This report is attached.
ANNEXURE H 6

The motivation contained the following averments:
i Since the initiation of the Municipalitys fibre installation project in 2004, the project
has always sought to find cheaper and more effective ways of laying fibre to its
offices.

i Over the past 18 months the municipality has been investigating efficient and cost
effective methods of laying fibre to support the overall fibre rollout programme.
i The investigation has led to the identification of a unique method of laying fibre via
the sewer and water reticulation systems.
i H2O Networks, a UK based company has developed a unique concept of
deploying optic fibre cables using the existing sewer and water reticulation
networks.
i In December 2008, the municipality commissioned a pilot project for the purpose
of exploring the viability of H2Os fibre in the sewer system technology in the
local environment.
i The pilot involved connecting two municipal offices, approximately 1,25 kilometres
apart using the technology in a 300 mm sewer pipe. Whilst the H2O technology
had been tested in the UK, it had not been tested in South Africa.
i It was found that the deployment using H2O method over a 1 km distance could
take on average 2 days as opposed to on average 10 days using the traditional
method.
i Based on the latest estimates provided by H2O Networks South Africa following
the pilot project compared with known costs of the traditional method on typical
equivalent distance, the following conclusion could be drawn:
Cost comparison on a 1,25 km distance:
Description MateriaIs and
Labour
Re-Instatement
Average
TotaI
Traditional R237 500 R437 500 R675 000
Sewer R240 157 R240 157

Based on the above, the cost of deployment using the sewer method is potentially
less than 40% of the traditional methods costs over the same distance.


i The standard H2O Networks operating model is strictly a long-term leasing model
of fibre owned by H2O Networks. H2O Networks have however agreed to price the
technology on a partitioned ownership basis (85%-15% in favour of the
municipality).
i In addition to findings above, the Water and Sanitation Department noted that the
pilot project was conducted in the 300 mm sewer pipe. It was anticipated that
smaller diameter pipes would be more suitable for the planned municipal fibre
rollout programme. Although there was sufficient explanations would work in
smaller diameter pipes, it is recommended that the pilot be extended to include
smaller diameter pipes.
i Based on the results of the extended pilot, the municipality will consider wider-
scale adoption of the technology.
i i3 Group Ltd in the UK had confirmed that H2O Networks South Africa is the only
company licensed in South Africa to provide this solution.
i Based on the quote provided by H2O Networks for a minimum order of 129km of
fibre, the costs associated will be R24 015 728.00 excluding VAT.
i Although funds had not been budgeted for this expenditure in the 2009/10 financial
year savings will be identified and an Adjustment Budget will be processed to meet
this expenditure.

Interview with Ms. Jacquie Subban
The investigating team met with Ms. Subban on 22 June 2011 to afford her the
opportunity to respond and/or address certain findings that had been made to date.
These questions and her responses, as relating to awards made to H2O Networks
are recorded hereunder:


Query Ms. Subbans Response
1 Please confirm your position, the
period the position has been held and
provide a brief description of your
responsibilities.
Head: GIPO, since 2002.Control over the
Whole Unit.
2 Who do you report to? City Manager.
3 Your position is very senior as you are
entrusted as the custodian of public
funds when money is spent by your
Unit. Do you agree?
Agreed.
4 Are you aware that the Municipalitys
SCM policies impose an onerous
responsibility on you in your position
when contracts are awarded?
I am aware.
5 Are you aware that the Constitution
and the Municipalitys SCM policies
impose an onerous responsibility on
you in your position when contracts
are awarded?
I was not aware of this. I am aware that the
SCM policies are quite strict. It was pointed out
to her that the SCM policies of the Municipality
are in line with the prescriptions of the
Constitution which require that when a contract
is awarded, it must be done in accordance with
a system which is fair, equitable, transparent,
and competitive and cost efficient.
6 A Section 36 award was made to H2O
Networks on 8 January 2009 for what
is known as the Pilot Project. Take
us through the process and the
reasons why section 36 was used.

Their method of laying fibre by using the sewer
and water reticulation system of the
Municipality is very cost effective, with a saving
of 70% compared to the traditional method of
laying fibre cables. There is also less
disruption to the city as fewer trenches have to
be dug. There was a desire to effect the rollout
as soon as possible. The pilot project was
used to determine whether the technology
would be suitable for the Municipalitys needs.

7 Why was H2O awarded the contract?

I was satisfied that they were the sole supplier
of the technology for using the sewer and
water reticulation system for laying the cables.
I was convinced that there would be cost
savings for the Municipality.
8 Would the Municipality not have
received better value for money if the
open tender system was used? If not,
why not?
Not necessarily. I believed that H2O were the
sole providers with access to the specialised
technology in the country.
9 Please confirm that Martin Cele and
R. Dhavraj performed work for GIPO
as consultant and employee
respectively.
Confirmed. Cele was a consultant to the GIPO
for a period of approximately 9 months, mainly
in respect of 2010 work. Dhavraj was an
employee in GIPO and he reported to me.
10 Dhavraj holds a managerial role at
H2O. Are you aware that as Mr. RS
Dhavraj had resigned from the
Municipalitys employ on 31 March
2008, quotations or bids from H2O
should not have been considered for
12 months as he was a stakeholder in
terms of the Municipalitys policies?
Section 13 of the SCM policy provides
A written quotation or bid may not be
considered unless the provider who
provided the quotation or bid has
indicated if the provider is not a
natural person, whether any of its
directors, managers, principal
shareholders or stakeholder is in the
service of the State, or has been in
the service of the State in the
previous twelve months. In the event
that the declaration is made and the
I was not aware of this clause. I did call Mr.
Cloete who is Head of Human Resources and
he advised me that although he did not know
of any specific legislation prohibiting the award,
the award of work to a former employee would
not look good.


quotation or bid is still awarded,
Section 45 prescribes how the award
should be reflected in the Annual
Financial Statements if the award is
for more than R 2 000.
Why, then was the Pilot project
awarded to H2O?
11 Have you ever accompanied Cele or
Dhavraj to any meeting with their
Mother company which is based in
the UK? If so, when and what was
discussed?
Yes. I was going to the UK on holiday and
Dhavraj requested that I should attend a
meeting with him whilst there. I attended this
meeting before the first S36 award could be
made. I did not see anything irregular as I
needed to find out more about the technology.
12 The second contract awarded to H2O
was for an amount of R24, 7 million.
This contract was awarded using
Section 36. Why was Section 36
used?
We were satisfied with the work done in the
pilot and there was a huge cost savings to the
Municipality from using this technology. It was
pointed out to Ms. Subban that under normal
circumstances, she would be correct. Here we
had a situation that a former consultant and a
former employee were being enriched using
public funds. She conceded that she had not
seen it in this light, but still believed that the
Municipality had received value for money.
13 Who was the author of the second
S36 contract with H2O? Did the
Municipalitys legal department review
the contract prior to signature?

H2O drafted the contract. Currently and
historically none of the contracts have been
drafted by the Municipality. We would like for
legal to examine the contracts but it is not
feasible to do so as their turnaround time is 3
months.

We have since rectified this by involving the
legal department in IT contracts subsequent to
the recent audit conducted by Internal Audit.


I have been trying to have a person with a
legal background to be appointed on a full time
basis to do this job, but to no avail. (Comment:
No proof of this was provided to the
investigating team).

Investigating teams submission:
This is a serious indictment and should not
have occurred in a department which awards
tenders worth millions of rand. There is no
acceptable excuse as to why the Municipalitys
legal department or its external legal
consultants should not have been involved in
the compilation or review of tenders. Allowing
the tenderer to draw up the contract, without
intervention by ones own attorneys, to
scrutinise and comment on whether the
contract protects the interests of the
Municipality is tantamount to gross negligence,
especially when allowed by the Head of a
Department. This negligence has resulted in
the Municipalitys interests being subordinated
in favour of its contractors. The problem is
exacerbated when the contracts are not
reviewed by professionals who have legal
expertise, as has been the case to date. As
submitted elsewhere in this report, H2O has
taken advantage of the situation in compelling
the Municipality to make an upfront payment,
before the services have been rendered.

The Legal Department has endorsed the

investigating teams conclusions relating to the
weaknesses in the contract refer to
ANNEXURE H 11
14 In terms of the second contract with
H2O, the Municipality undertook to
have the goods insured when it was
shipped from the UK on 29 December
2009.
That was not my interpretation. My
interpretation was that the ownership would
have passed only when the goods were
received at our premises.
The importance of having legal documents
perused by a legal professional was repeated
to Ms. Subban.
In this instance it was fortunate that Ms.
Subban only signed the contract after the
goods had arrived in South Africa, otherwise,
the Municipality would have been
unnecessarily exposed to the risk of providing
insurance cover for goods belonging to H2O
South Africa.
15 Was the Municipalitys insurance
company informed of this additional
risk and did they provide specific
cover for this shipment?

No, (the Municipalitys insurance company was
not informed) because we did not take on
responsibility or liability between the UK and
our premises only thereafter.
It was pointed out to Ms. Subban that the
vendor had sought to transfer the liability for
the insurance of the goods to the municipality
in terms of the contract that they had drawn up
and signed on 21 December 2009, before the
goods had been shipped on 29 December
2009. It was fortuitous that Ms. Subban, as
Head: GIPO had only appended her signature
to the contract on 22 January 2010, after the
goods had arrived in South Africa by that date.

16 Why was the invoice dated 22
January 2010 approved for payment
by you, the same date that you signed
the contract?
In the case of small businesses the
Municipality in terms of procurement of goods
and services has paid in part for goods
supplied. Also in terms of the model negotiated
it was seen as two separate parts.
It is interesting to note that Ms. Subban signed
the contract on 22 January 2010 Refer to
ANNEXURE H 10
The invoice from H2O for R15 977 929, 92
was dated 19 January 2010 and Ms. Subban
approved the invoice for payment,
ANNEXURE H 13
on 22 January 2010, the same date that the
contract was signed.
The investigating team informed Ms. Subban
that it was agreed that companys cash flow
would have been affected negatively, but
disagreed that it was the Municipalitys
obligation to assist the company with its cash
flow challenges.
17 Clause 10.4 provides The customer
is obliged to pay for patent annual
licences equivalent to 15% of the cost
of installed fibre. Alternatively H2O
Networks South Africa will waive the
charge for 15% ownership of installed
fibre.
The latter option was negotiated. The bid
report explained this option and sought
permission from the bid adjudication
committee. As part of negotiating ownership of
the fibre and not the conventional leasing, this
option was arrived at.
Ms. Subban submitted that the 15% ownership
entitled H2O to use up to 15% of the network
at no cost. The alternative was to pay the
annual maintenance fees which she refused to
do. The Legal Department has described this
clause as bizarre. Refer to

ANNEXURE H 11

18 No provision has been made for the
second contract to H2O to be
witnessed. Why?
This was an oversight. Subsequent contracts
are being looked at by the Legal department
who will ensure effect contract management.
This is a poor contract, drafted by the
contractor and deliberately worded to protect
mainly the interests of the vendor. It is
inconceivable how the Head of a Department
cannot recognise a defective contract. It is
submitted that the problems posed by this
contract could and should have been resolved
prior to the award and that these issues would
have been highlighted if the contract was
properly reviewed, prior to signature.
19 This contract appears to be one-sided
and designed mainly to protect H2O
Networks (Pty) Limiteds interest.
Complying with SLA issues was dealt with
separately, through the process that was
overseeing all other fibre installations. This
contract was only dealing with supply and
delivery. The supply and delivery was then
shaped to accommodate the Municipalitys
need to own the fibre. In respect thereof the
Municipality adopted the principle of paying for
goods and then for installation.
The admission by Ms. Subban that currently
and historically none of the contracts have
been drafted by the Municipality and the
concession that these contracts are not
reviewed by professionals with legal expertise,
confirms the assertion that contractors are
being given carte blanche to draft contracts in

a manner that protects mainly their own
interests at the expense of the Municipality.

i In March 2011 the Municipalitys Legal Department reviewed the second contact
and provided a report which supports the investigating teams findings. Their
report, which is enclosed as ANNEXURE H 11
included the following:
Your request that I examine the contract referred to above and advise if the
interests of the Municipality have been adequately protected refers. I have briefly
examined the contract and I have noted the following:
1. The contract appears to be for the supply and installation of fibre optical cable
underground system (FOCUS);
2. There is no price indicated in the contract, nor can the price be determinable
from the contract;
3. In terms of paragraph 4.2 the price will be affected by exchange rate
fluctuations in contravention of section 47 (a) of the MFMA;
4. In terms of paragraph 4.4, H2O Networks may re-adjust the price due to
delivery deadline extensions, alterations in economic circumstances or other
reasons- placing the municipalitys resources at risk;
5. The paragraph dealing with delivery does not spell out the terms of delivery.
Further the contract reserves to the supplier, the right to make partial deliveries
and seeks to protect the suppliers even in circumstances where they should
take responsibility. The contract further stipulates that delays in delivery
cannot justify indemnity claims for losses nor be the basis for the rescission of
the contract. It is submitted that in a contract for supply and installation,
delivery is a material term of the contract and should be crafted to protect the

interests of the municipality. This contract does not protect the rights of the
municipality;
6. The paragraph dealing with supply suggests that supply will be completed when
the municipality is provided with a bill of lading. The effect of this is that the
risk would pass to the municipality once the goods are loaded and the
municipality would be expected to pay for the goods when invoiced, even if the
goods have not been received;
7. Paragraph 10.4 obliges the municipality to pay annual licence fees which will
cost 15% of the cost of the installed fibre; alternatively the supplier will waive
the licence fee for 15% ownership of the installed fibre. This is a rather bizarre
provision;
8. In paragraph 11.1, the supplier provides a guarantee against manufacturing
defects. I do not understand how they can provide such a guarantee when
they are not the manufacturers.

THIRD AWARD
The third award to H2O in the amount of R53 000 000.00, in respect of which
contracts were signed on 9 November 2011, is yet to be comprehensively
investigated.

CONCLUSION
Prima facie evidence exists that the first two Section 36 awards made to H2O
Networks South Africa were irregular, in that the awards did not comply with the
requirements of the SCM policies of the Municipality.


RECOMMENDATIONS
It is recommended that:
i EMM should conduct an independent legal review of the two awards to limit the
risk of exposure.
i The third award to H2O should be investigated by the Municipality.
i EMM must recover the irregular expenditure in terms of Section 32 (2) of MFMA.
i Ms. Jacquie Subban should be provided with a copy of this section of the report
and be instructed to formally respond, within a reasonable period, as to why
disciplinary and/or criminal proceedings in terms of Section 32 of the MFMA
should not be instituted against her.

Manase Report H2O Networks-Subban Irregularities

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Department of Co-operative Governance eThekwini MetropoIitan MunicipaIity

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