Armscor, Castle Control Board 2012/13 Strategic plans, Department of Defence 2nd quarter expenditure, Committee programme adoption

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Defence and Military Veterans

28 November 2012
Chairperson: Mr M Motimele (ANC)
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Meeting Summary

ARMSCOR presented its corporate strategy to the Committee, which briefly set out the mandate and vision of ARMSCOR. The major challenges were then outlined, with an emphasis on financing of the Group, insufficient funds to execute the mandate, the need for greater resourcing of the organisation through skills retention, renewal of HR and repositioning its HR capability. The Committee asked ARMSCOR to firstly explain what it was doing differently under the new Board, and who had developed the strategy, since a DA Member noted criticisms from senior officials (who were not named) that the strategy was not truly reflective of the business. However, the relevance of this question was queried by other Members, and the ANC pointed out that there was nothing controversial in the strategy, which was in line with the vision and action plans. They asked about the links with the Defence Review Committee. Members asked for clarity on the statements that ARMSCOR would be a champion of commercialisation and diversity, questioned the use of tractors, and asked for more detail on its approach and analysis of the environment. They also asked if there was an overlap in the mandates of ARMSCOR and Denel.

The Castle Control Board (CCB) of the Castle of Good Hope briefed the Committee on its objectives and functions. The main pillars of the strategy were to preserve and protected the military and cultural heritage of the Castle of Good Hope, to optimise its tourism potential and accessibility by the public. It had a number of programmes to deal with HR, research, stakeholder relationships, corporate governance and delivery of the Castle as a heritage site. Four programmes aimed to increase the public profile and positive perceptions. Two major risks had been identified, the first relating to failure to  preserve and protect the military and cultural heritage of the Castle of Good Hope, and the second to the contract for acquisition of Het Bakhuys assets. Members asked for more information on the progress of signing the Memorandums of Understanding and Service Level Agreements with stakeholders, and called for a status report on the appointments of a Chief Executive Officer and Chief Financial Officer, as also whether part-time appointments had been considered. They wanted more information on the audit committee, risks and Board responsibility, uniform costs, and called for clarity on whether the figures presented represented money that had been acquired, or were projections. The CCB explained that it received no grants or government allocations and was expected to be self-funding. The staff figures were also questioned. Although Members recognised that this was the first time that the CCB had reported to this Parliament, they urged that standard documentation and reporting formats be adopted in the future.

The Department of Defence and Military Veterans (Department) then briefly outlined its 2nd quarter 2012 expenditure and performance, concentrating on the high risk areas. One was the compliance with the Defence Enterprise Information Systems Master Plan targets, which was primarily not met because of late sending of invoices by the State Information Technology Agency, although there was now a contract holding it to account. Research capability had also suffered due to the secondment of some staff in this section to the Democratic Republic of Congo, which meant that their areas of research were not being worked upon at the moment.

Members asked for a detailed report on the frigates, their operational status and the blockages in the Dockyard, more detailed reports on the grounding of aircraft, what Project Vagrant was, the costs of Project Corona, the negative trends in health and fitness, and the reasons why the Armaments Council had not met. They also asked for the reasons and corrective action for underperformance in Project Drummer. Questions were asked about the deviation from the Public Finance Management Act and the virements. A DA Member asked if spending at Nkandla was channelled through any defence accounts, but an ANC Member objected to this, and the question was not answered. Other questions related to collection of revenue, and transfer operations, adjusted estimates, particularly in the Administration Programme, cash held, and the morale of the forces. Other unanswered questions related to company logistics and sustainability, the schedule changes and cost implications of the planned missile development project between Denel and Brazil, the Defence Attaches, and reports on vacancies.

Meeting report

ARMSCOR: Corporate Strategy briefing
An official from ARMSCOR briefed the Committee on the functions of ARMSCOR (see attached presentation for details). It was also outlined that the additional functions were to procure commercial material on behalf of any organ of the State, and, subject to arms control rules, to acquire defence material and manage technology projects on behalf of any sovereign State.

The activities of the first eighteen months of office of the current Board of ARMSCOR were outlined. The official set out the strategic environment in which ARMSCOR operated. Denel, as a pillar of ARMSCOR, produced critical strategic and essential systems and solutions that could not be compromised. One of the critical success factors was to build strong international partnerships.

The challenges were then briefly described. These included insufficient funds to execute the mandate, and the resourcing of the organisation, which involved the need to retain skills, renewal of Human Resources (HR)  and repositioning the organisation’s HR capability. ARMSCOR faced some operational inefficiencies and its effectiveness had to be bolstered. Local industry support and negative perceptions about ARMSCOR remained as challenges, and these were caused by lack of understanding of the Corporation’s legal mandate and processes. A member of ARMSCOR finally noted that financing the Group remained a challenge.

Mr D Maynier (ANC) asked who had developed the strategy, and whether ARMSCOR had used consultants. The Senior Management assessment of the strategy had not been positive.

The official from ARMSCOR replied that although Mr Maynier had spoken about senior ARMSCOR employees, they were not present in this meeting, and he was not sure to whom Mr Maynier was referring.

The Chairperson asked Mr Maynier to speak to the relevance of his question.

Mr Maynier said that senior and experienced employees of ARMSCOR had been given the opportunity to look at the strategy, and had said that it appeared to demonstrate “an abysmal lack of knowledge of the business”. He believed that his question was relevant.

Mr S Esau (DA) said that Mr Maynier’s question was very specific, as it had asked who had developed the strategy and if consultants from outside the organisation had been involved or not.

The Chairperson said that it would be useful to cite any particular gaps that they saw in the strategy.

Mr Maynier repeated his question and said that he merely wanted to know if consultants were involved.

The official from ARMSCOR responded that the strategy was developed by the Board, and no consultants were used.

Mr Maynier said that he now was informed of the fact that the Board had developed the strategy. He asked if ARMSCOR was intending to diversify as suggested.

Mr A Maziya (ANC) said that he did not know what Mr Maynier had meant when he suggested that the strategy document was controversial. It was presented here, with the vision and the action plan and he felt that if there was any potential controversy, it should be specified where that lay.

An official from ARMSCOR said that the  function of ARMSCOR was stated in law, and that it could not be said to have discharged its functions until the entire mandate was carried out, as set out in the Act.  It was important to see matters in this way. He would appreciate any questions that helped ARMSCOR to assist in the process of setting its strategy.

Mr Maynier asked if the Defence Review Committee (DRC) had been consulted when this strategy was developed.

The official from ARMSCOR replied that there would be continual engagement with the Defence Review Committee, as this Committee was part of the process.

Mr Maynier said that ARMSCOR had a legislative mandate. However, although he stood under correction on this point, he did not believe that it had any legal authority to deviate into production, as the strategy suggested.

The official from ARMSCOR said that he was not sure that ARMSCOR was in fact saying it was deviating into production. It had said that it wanted to champion commercialisation and diversity. Everything set out in the strategy was covered by in the ARMSCOR Act of 2003.  

Mr Maynier said, in relation to partnerships, that it seemed from the last interaction between General Mojo Motau, Head of ARMSCOR and the Committee, that there was some hostility to foreign countries and that there was selective assessment on whom would be engaged. Hostility had been showed to European ownership and participation, and participation was sought with “red” countries like China, Brazil and India. He asked if this could be explained, and whether it was pure business decisions or ideology that motivated this approach.

The official from ARMSCOR replied that ARMSCOR had international strategic partners, and its strength was based on a proper analysis of the environment, supported by the analysis from the Department of Defence (DoD or the Department). All challenges were examined and analysed before decisions were made. 

Another official from ARMSCOR added that, with regard to its sovereign capabilities, South Africa was looking to regaining control of foreign technologies.

Mr Maynier asked what the production of tractors had to do with the defence industry.

An official from ARMSCOR replied that continuous tractor systems were required for the military, and ARMSCOR wanted to invest more in this aspect. The tractors referred to in the presentation were vehicles that pushed aeroplanes, and were linked to the hydraulic system.

Mr E Mlambo (ANC) asked how ARMSCOR was intending to use its expertise to support government acquisition efforts.

An official from ARMSCOR replied that the reports were clear on combining acquisitions, which were split between the Defence Force and ARMSCOR.

Mr Mlambo asked if ARMSCOR had already established the Committees of the Board or if this was something envisaged for the future.

The official from ARMSCOR replied that Committees had been established to deal with the different areas of work in ARMSCOR.

Mr Maynier asked if facts were available to back up the assertion that there was a concerted effort to undermine the unity and cohesion of SADC. He asked who the conspirators were.

The official from ARMSCOR said that an analysis of sectors was important and decisions made were a product of the analysis. It made no sense to identify conspirators. Analysis would allow for the industry to be protected. He was not sure who was undermining the efforts in the industry.

Mr Maziya also asked for an answer to the question on risks, saying that the Committee did not have an understanding of the SWOT analysis. A closed meeting had not been requested where every detail was required. He asked if a closed meeting was possible, at some point, to get more detail on all these points.

An official from ARMSCOR replied that all sections should be read, as specific sections dealt with specific areas.

Mr Esau asked how Denel Aviation and ARMSCOR fitted together.

An official from ARMSCOR replied that there was not an overlap in the mandates between ARMSCOR and Denel Aviation. 

Another official added that it was suggested that Denel Aviation fell under the Ministry of Defence and Military Veterans and under the Ministry of Public Enterprises. It could be that the Board at the time had decided to split the two, in 1992. The current Board was working on pulling Denel Aviation and ARMSCOR  closer together.

Mr Esau asked for clarity on the strategy, and if the Defence Review process was considered in this regard. 

An official from ARMSCOR said that the strategy should be considered with a full understanding of what ARMSCOR was supposed to be doing in terms of acquisition, right from acquiring the technology to being able to anticipate future requirements of clients. Enablers, and Research and Development (R&D) were present inside and outside ARMSCOR.

The challenge lay in sustaining the organisation, and dealing with the deficits as set out in the financial model. If the strategy was embarked upon, then the situation of enablers could be dealt with, and the Dockyard could be turned around. The Dockyard was a great icon in naval capability. However, there was old equipment there, and ARMSCOR was in the process of calling on collaborators for assistance in developing a feasibility study to take this forward, as there was currently a bottleneck. In due course, ARMSCOR would come forward with an overall proposal to relieve the situation.

Mr Esau asked how the erosion of skills was going to be addressed.

An official said that the erosion of skills was apparent where there were problems with the ageing staff, and the retention of new skills. Special mentoring programmes, bursaries, training and development were used to retain young staff.

Mr Maynier asked how ARMSCOR would be able to afford to buy back technologies. He pointed out that since ARMSCOR served shareholders, he wanted to know if the Minister had signed off and approved the strategy.

An official from ARMSCOR said that the Minister of Defence had participated in the discussion of the strategy and had signed off the Shareholder Compact, in which it was clearly indicated what the strategic plans were. There was no question around whether the Minister had approved, as the Minister was fully aware of the strategy.

Another official added that there was support for all who wanted to invest. This was a broad mandate. Finally, the Committee was invited to visit ARMSCOR.

Castle Control Board (CCB) 2012/13 Strategic Plan and Annual Performance Plan briefing:
Lt General Justice Nkonyane, Chairperson, Castle Control Board outlined the three specific objectives on which all planning and operations for the Castle Control Board (CCB) were based. The CCB preserved and protected the military and cultural heritage of the Castle of Good Hope (the Castle), optimised tourism potential of the Castle, and optimised accessibility to the Castle by the public. The performance environment of the CCB was based on a number of strategic pillars, including HR, research capability, stakeholder relationships, corporate governance and the delivery of the Castle as a heritage site.

He summarised the facets of the strategic priority of the CCB to optimise access to the Castle by the general public. The CCB ran four programmes that aimed to increase the public profile and positive perception across all sectors, to maximise the tourism potential of the Castle, to preserve, interpret and showcase the history of the Castle and the Administration of the country, and finally, to comply with the regulatory framework.

The risks that the CCB had identified were enumerated. The first related to failure to preserve and protect the military and cultural heritage of the Castle of Good Hope.  The second related to the failure to negotiate an appropriate contract for the acquisition of Het Bakhuys assets, without adequate planning. Full details of each of these, and the steps taken, were set out in the attached document.

Mr Esau asked for information on the progress of the Memorandums of Understanding (MOUs) and Service Level Agreements (SLAs), between the Castle Control Board (CCB) and its stakeholders.

Lt Gen Nkonyane said that some challenges had been experienced with MOUs for the past two years. The Service Level Agreement (SLA) had been finalised, and this had set out the Recognition Scheme that would soon be in operation, with a focus on sustainability.

Mr Esau asked for a status report on the appointments of a Chief Executive Officer, and the Chief Financial Officer (CFO), and asked if the CCB had considered a part-time placement of a CFO

 Lt Gen Nkonyane replied that there was an understanding that whilst it was important to have a Chief Executive Officer, the CCB could not in fact afford to appoint high profile people to either this post, or to the post of Chief Financial Officer. The CCB had a very low budget.

Mr Esau asked if the situation regarding the Audit Committee had been addressed, and if the vacant positions had been filled.

Lt Gen Nkonyane said that the priority at the moment was to appoint a Chief Executive Officer. Policy guidelines would then be given to this person in relation to other posts. Marketing and evaluation were important areas for this position.

Mr Esau asked about risks and Board responsibilities, especially beyond the strategic plan.

Lt Gen Nkonyane replied that this area had not been finalised as yet. The King 3 Report on Corporate Governance had been adopted. The Board also hoped to mitigate the risks in other areas of responsibility. He noted, in regard to risks identified, that there were no enforcement powers for members and stakeholders, and reliance had to be placed on the people to recognise the importance of their portfolios. There was now full participation, although he said that the Board struggled to meet all the guidelines set out in the King 3 Report.

Mr L Diale (ANC) asked if all the huge amounts mentioned in the programme had already been acquired, or if it was a projection of what was still to be acquired.

Lt Gen Nkonyane replied that the CCB did not get money from anywhere, and relied on its operations to fund itself. It received no grants or allocations from government. Instead, the Castle attracted visitors and rented space to get its income.

Lt Gen Nkonyane appealed to the Committee to be aware that the CCB was at a developmental stage and developing a learning curve.  

Mr Esau asked for information about the increase in consultants. 

Capt Francois Morkel, Castle Manager, replied that the compensation of employees at R1.368 million was set out, to indicate to the CCB that it should be careful to keep its spending low. This figure was not in line with spending. However, the CCB had set budgets. He pointed out that no Executive Director for the CCB had yet been appointed.

Mr Esau asked about the figures for increase in uniforms, and the Audit Report status, given as “5”.

Capt Morkel replied, in relation to the audit, that the report was limited to five indicators.

Capt Morkel noted that the CCB was hoping to bring back the changing of the guard. Uniforms were only needed for a certain section of staff, but were very expensive, and the CCB was slowly trying to upgrade uniforms.

Mr Esau said that better targets were needed and the CCB had to explain the status of the completion of the plan.

Capt Morkel said work was being done on the Frontier Displays. The CCB was also sorting out the history and other displays. It had applied to the National Lotteries Board for funding.

The Chairperson said he was not sure how the CCB was working without a strategic plan, but the Committee understood that this was the first time that it had made a presentation to this Parliament.

Mr M Nhanha (COPE) agreed that this was the first time the CCB appeared before the Committee. However, he stressed that the CCB should try to ensure that it used the proper format and wording for reports, and it should try to improve, and fine-tune the areas of the strategic plan that had been highlighted in this meeting.

The Chairperson said the Committee would be doing further oversight on the strategic plan.

Department of Defence and Military Veterans ( Defence Secretariat and SANDF) : 2nd Quarterly Performance Report for Financial Year 2012/13
An official from the Defence Secretariat tabled and briefly outlined the 2nd Quarter of 2012/13 Performance Report, for the Department of Defence and Military Veterans (the Department). He drew the attention of Members to the Summary of Quarterly Performance Targets (see attached presentation for details).

One of the high risk areas, shown by the percentages that reflected indications of performance, was in compliance with the six Department of Defence Portfolios of the Defence Enterprise Information Systems Master Plan. This was primarily due to the late sending of invoices by the State Information Technology Agency (SITA). Business agreements had subsequently been signed with the SITA, to hold it accountable strictly to the performance agreements.

The other high risk performance indicator was the status of the DOD Research Capability. In this area, there were capacity constraints, because personnel had been seconded to the Democratic Republic of Congo. This area would remain a high risk area until those personnel were released back to work in South Africa.

Mr Maynier asked if the Department could name each frigate and what state these frigates were in.

Admiral Alan Green, Chief of Military Policy, Strategy and Planning, South African National Defence Force, said that the operational cycle of the frigates reflected two ships, since the other two were in extended maintenance cycles. He noted that one frigate was currently operational, and pointed out that the Dockyard did not have capacity to turn the maintenance of these ships around in a short cycle, although this was normally done during planned maintenance cycles. There was a capacity problem at the moment. If the necessary capacity existed, the SANDF firmly believed that both the frigates would be operational.

Mr Maynier asked if the entire South African Reserve Squadron had been grounded.

Admiral Green replied that the Gripens had not been grounded. The 173 hours constituted the number of hours that were flown, in terms of the budget. The Defence Force did have an Airframe Availability Programme that indicated when aircraft should be flown, and was currently busy developing a strategy to use the aircraft optimally, and within the budget. The Residual Squadron was not performing because there was a moratorium on using these craft. An investigation into methods used, and the way Squadrons were used, was under way.

Mr Maynier asked if there was a negative trend with regard to health and fitness and if anything had been done to reverse the trend.

Admiral Green replied that the situation with health was interlinked with budgetary issues. The National Treasury had restricted the Department in terms of the allocations. There was also a directive to reduce the intake of youth into the Military Skills Development System. This meant that there was currently a large component of elderly members, and that the ratio of youth entering the Defence Force had diminished substantially.  

Mr Maynier asked why the Armament Council had not met.

Admiral Green replied that a workshop was held to overcome the delays in calling the meetings, which were caused by a number of factors. The Defence Force was starting to work on the issue of internal resources to manage these projects. This would be put into the Action Plans.

Mr Maynier asked what Project Vagrant was, and if facilities were at risk. 

Admiral Green replied that Project Vagrant came about when the SANDF had realised that with the inception of four new aircraft types, there was a need to increase the facilities at the airbases. The Gripens, Hawks and 109s materialised because the Links Helicopters fitted into an environment that was secure. The facilities at certain environments had to be improved. This was an ongoing process. He assured Members that the delays did not mean that there was a situation of high risk. Some of the assets of Project Vagrant would go to the Waterkloof airbase.

Mr Maynier said that there had been massive underperformance by Denel in regard to Project Drummer. He asked why, and what corrective action had been taken. 

Admiral Green replied that Project Drummer affected the day-to-day operations of the South African National Defence Force. Denel had indicated that it did not have the human resources to be able to cope with the demand. This was similar to the situation at the Dockyard. 

Mr Maynier asked how much money had been spent on Operation Corona and if there had been under spending or over spending on this operation. 

Admiral Green replied that the budget for Operation Corona was insufficient.

Mr Esau asked which tender had been delayed, and for more explanation on the bottlenecks.
An official from the Department of Defence replied that the bottlenecks lay in the ICT environment. The project had been at planning stage for quite a while. The main bottlenecks were located at the Procurement Centre. The situation was, however, now back under control.

Mr Esau asked about research capacity, asked why a particular person had not been appointed, and noted the importance of the organisational and structural design to the Defence Review process.  

An official from the Department of Defence said that the Research Unit was not necessarily linked to the organisational structure of the Defence Force, but was impacted upon by the situation in the Democratic Republic of Congo (DRC). The staff who were required to work on the organogram were currently located in the DRC. The research unit had to support policy development, and at the moment, when research on policy development was required, the SANDF was tapping into ARMSCOR resources. It was, however, envisaged that the staff currently in the DRC would soon be released and would return to South Africa. When capacity was again available, there would be further work done on the organisational structure.

Mr Esau said that two irregularities had been identified with the Public Finance Management Act (PFMA) implementation. One related to more than 50% deviation from the budget of one of the programmes in the Vote. He asked why money had been taken away from Landed forces.

Mr Banie Engelbrecht, Chief Director: Budget Management, SANDF, said that all environments were strictly controlled, and subject to an audit by the Auditor-General. All the documents were made available and the information was included in the Adjustment Appropriation Bill, so that all changes were noted and there was nothing irregular in the situation. The deviation from the PFMA guidelines had been reported to the Minister and National Treasury.

Mr Esau questioned the issue of committed funds being put into operational expenses. This required special permission. Even if special permission was granted, he wanted to know why the Department had operated in this fashion.

Admiral Green said that it was about infrastructural spending of money that had been planned for. The Departmental Planning and Evaluation Committee, rather than make transfers to an area where there was no prior planning, would suggest to the Plenary Defence Council that funds should be shifted to areas where plans had been made, but no funding was available, to ensure that the allocations were in fact used by the Department.

Mr Esau asked for clarity about the huge discrepancies in the collection of revenue.

The Acting Chief Financial Officer, SANDF, responded that in the current year the revenue collected was in line with the projections. The “revenue received” amounts referred to transfer operations where funds were obtained from the African Union and the European Union, in Africa. In the past financial year the Memoranda of Understanding (MOU) were not properly signed, so there was no clarity on the amounts collected. This situation had subsequently been dealt with, and the Department of Defence was then able to project the amounts, even though the MOUs had already signed.

Mr Esau asked why the budget for the Administration Programme had been increased by R10 million.

The Acting CFO referred to the adjusted estimates. The figure of R190 million referred to salary increases, which cut across all programmes. Both the R190 million, and the R142 million for transfers and subsidies, were allocated throughout the programmes.

Mr Esau noted that the Department showed significant amounts for cash flow, and he asked why money had not been spent.

The Acting CFO said the way in which invoices were handled was being reviewed, so that invoices had not been flowing as planned. The invoices received from the Department of Public Works for municipal services also had not been processed as planned. This situation would now improve, because the Department now had a Departmental Programme and Budget Evaluation Committee who would be looking at the programmes that had underspent, and would be advising on how the funds could be utilised.

Mr Diale asked about the morale of the forces.

An official from SANDF responded that the morale had improved, due to the improvement in the conditions of service. A committee was set up to advise the Minister on such matters. There was also now an Ombud to deal with grievances.

Mr Maynier said that media reports in the Sunday Times had indicated that the state of the Navy’s frigates was very serious, as only one was functional, and two frigates had major defects that the Dockyard was unable to repair. He asked for clarity on the situation.

Admiral Green said that the two frigates did not present a problem, as they took up the capacity of the Dockyard. However, the bottleneck occurred with the third ship. Two frigates would come out in the normal cycle, as only one had operational defects.

Mr Maynier expressed concern about the 24 Gripens that were delivered but were not operational. He asked how many that were on the lot could be operated, and he wanted to know how SANDF would deal with the aircraft that could not be kept in the air.

Admiral Green said that this was a detail for discussion with the Joint Standing Committee on Defence.

Mr Maynier asked whether the spending on the Presidential Health Port Unit at Nkandla, which was a National Key Point, was channeled through the Special Defence Account, or through the South African Military Health Service. He asked how much was spent in the year under review.

Mr Maziya commented that the DA appeared to be obsessed with the President of South Africa. He did not believe that either Nkandla, nor the President, were mentioned in the presentation. He objected to the question, saying that Mr Maynier and everyone else on the Committee knew that the Department of Defence had nothing to do with Nkandla, as this was handled by the Department of Public Works, and for this reason he suggested that Mr Maynier should be attending meetings of the Portfolio Committee on Public Works.

The following questions were raised but not answered:

Mr Esau asked for clarity about the company AB logistics and how it was going to sustain itself. He also noted that the report did not mention risks and asked for clarity about this.

Mr Maynier asked by how much the schedule of the planned missile development project between Denel and Brazil had changed, and what the cost implications were.

Mr Maynier asked ARMSCOR to explain to the Committee what it was doing differently under the new Board.

Mr Esau asked if the existing Defence Attaches  were new appointments.

Mr Esau asked for a report on vacancies, and if critical posts had been filled.

The meeting was adjourned.


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