Analyses of 2013/14 Annual Reports of Department of Defence, Armscor, Castle Control Board

Meeting report

Overview of Outcomes, Priorities and Key Issues for Oversight of DODMV & its Entities
Mr Peter Daniels, Committee Researcher, presented the Department of Defence and Military Veterans outcomes, strategic focus areas, future spending plans and issues for monitoring and oversight (see document).

Analysis of Department of Defence 2013 to 2014 Annual Report
Mr Wilhelm Janse van Rensberg, Joint/Select Committee on Defence Researcher, briefed the Committee about the following concerns:
• Only 17 of the planned 25 incidents of corruption and fraud reported for detection were achieved.
• Serviceability of equipment for external operations was only at 77%.
• High spending in the last quarter.
• Percentage of budget spent versus percentage of targets achieved.
• Dramatic reduction in the number of targets compared to 2012/13.
• The number of classified targets
• The cancellation of four international military exercises (Three of which were also cancelled in 2012/13).
• The deployment of SA Navy personnel for Naval Control and Guidance of Shipping training to other SADC countries.
• The alternative utilisation of re-allocation funding.
• The number of learners on courses.
• Low number of crime prevention operations by the Military Police.
• Low retention of core skills.
• Low rate of appointment of engineers and aircrew.
• Additional funds for Air Defence personnel remuneration.
• Sale of goods and services other than capital assets remain unclear.
• Fruitless expenditure due to cancellation of a contract.
• Funds spent without PPPFA compliance.
• Internal Audit: A fully functional internal audit committee was not in place.
• Financial statements were not prepared according to the PFMA.
• Expenditure management: No effective steps taken to prevent irregular expenditure.
• Leadership: The DOD did not exercise sufficient oversight responsibility regarding financial reporting over capital assets.
• Financial and performance management: Existing manual and automated controls were not designed to ensure adequate record keeping.
• Governance: The DOD is still in the process of capacitating the internal audit component.

Analysis of Armscor 2013/14 Annual Report
Mr Calvin Manganyi, Committee Researcher, briefed the Committee on the following about Armscor:
• New Board of Directors.
• Acquisitions.
Capital equipment acquisition contracts are currently at R4.776 billion; this is a18.6 % decrease compared to R5.869 billion for 2012/13. Challenges included:
            - Class 209 Mod 1400 Submarines;
            - Agusta helicopter upgrades;
            - Lead-In Fighter Trainer Aircraft ;
            - A-Darter Missile and Recognition pod;
            - The Ground-based Air Defence System;
            - Delays in the Tactical Communications Systems;
            - Defence Industrial Participation.
• Defence Industrial Participation.
A comprehensive explanation of the MBDA DIP agreement and reasons for the factthat obligations are not met as well as what steps will be taken to remedy the situation.
• Armscor Dockyard.
• HR Management and Transformation.
• Performance Overview: Under achievements and Challenges.
• Financial Statements and Report of the AGSA.
The total comprehensive income decreased significantly from R1.193 billion in 2012/13, to R103.3 million in 2013/14. Fruitless and wasteful expenditure was R393 892, Decrease in Armscor Revenue (from R9.2 million in 2012/13 to R6.8 million in 2013/14), and Irregular expenditure (R68.5 million)

Analysis of Castle Control Board 2013/14 Annual Report
Mr Calvin Manganyi, Committee Researcher, gave an analysis of Castle Control Board performance which yielded the following questions:
• When will the overhaul of the Castle be completed?
• What were the reasons for imprecise budgeting leading to a missed target by R679 482?
• Was all planned refurbishing completed or is there any outstanding work that may need funding?
• For how long was the Castle closed?
• Would the Castle have achieved its set target for tourist numbers if it was not closed for that period?
• How much estimated revenue was lost during the closed period?
• What were the reasons for setting the target so low for projected revenues from events, film and fashion shoots during 2013/14 even though the previous achievements indicated an upward trend?
• What were the reasons for low budgeting on ‘Increased public profile and positive perception across all sectors of the community’ leading to overspending of R107 000?
• Given that the Castle did not achieve its target for the number of visitors, could the underspending on marketing be linked to that?
• According to the Annual Report, R111 000 was spent on Performance Rewards for Top Management. A total of R112 000 was spent on bonuses. Is it only the CEO that qualified for a performance bonus?
• R28 000 was spent on increase in leave pay; (a) Who was it paid to, (b) for what, and (c) Why is was no money spent in 2012/13 on this item?
• What led to the increase in expenses for the Military Tattoo to R145 000 in 2013/14 as compared to R44 000 in 2012/13?
• What are the reasons for a 98% increase in Advertising versus a 5.33% increase in Net Ticket Sales?
• What were the reasons for low budgeting on ‘Increased public profile and positive perception across all sectors of the community’ leading to overspending of R107 000?
• As required by Treasury Regulations 16A9.1(d) and the Preferential Procurement Regulations, were quotations awarded to suppliers whose tax matters have not been declared by the South African Revenue Service to be in good order? If not why not?
• While the CCB is commended that incurring no fruitless and wasteful expenditure, how will it address concerns to prevent irregular expenditure as R93 000 was recorded in 2013/14?
• What plans are in place to address the leadership concerns identified by the AGSA be addressed?
• How will the Financial and Performance Management concerns identified by the AGSA be addressed?
• How will concerns identified by the AGSA be addressed?
• Concerns included vagrancy and crime, the Het Bakhuys Restaurant, and Economic viability as an increase in Staff Costs will decrease the accumulated surplus in the next 10 years unless there is a significant increase in revenue.

Discussion
Mr D Gamede (ANC) asked whether the 89 000 mentioned was for the year or the month.

Mr Manganyi said that the 89 000 was not for the full year. It was a semi-temporary position. A previous appointment made. It was an outstanding issue. The appointment was made in February. But he can provide the details at a later date.    

Mr Gamede asked if that was for one month or closer to seven months because it is important to compare results with regard to equal time periods. One month may not yield as many results as seven months.

Mr E Esau (DA) commented that when contacting the Castle, the Committee works with Captain Wolcott. This is a junior position and yet the salary is big. He asked the cost for employing positions like these. He suggested that the salary and expertise the Chief Finance Officer has is beyond the scope of a small operation like the Castle. He insisted that a Chief Executive Officer is deemed necessary, but there is no need for a large Finance Officer role if there are not fundamental financial undertakings. It is his understanding that the CFO was only part-time. He is concerned about the sustainability of the Castle, but believes that it is working on a commercialization program. He suggested that they outsource a company to write a plan so that the Castle can attract tourism of all kinds and thus accumulate more revenue. If not, in less than 10 years, all of the money will be depleted; there is no zero-budget with funding from the Treasury. There are people working at the Castle for the Defence Department. The Castle has employed more people at an additional expense that has not been budgeted for. The approximately R39 to 40 million will be used tremendously in the next few years unless other funding is found. This is a great concern. He asked the Chairperson as to whether or not the questions being raised can all be addressed?

The Chairperson said that all the questions can be asked. Time can run out but that the department can be directed to reply in writing to the questions. This mindset should be promoted.

Mr Esau  said that after last meeting, he sent 65 questions that went unanswered.

The Chairperson stated that normally the Committee gives the department timelines. He suggested that new mechanisms for responses and accountability be considered because the follow-up mechanism needs to be approved.

Mr Esau said Armscor is a major concern. Armscor was claiming that there was not enough money for all of their commitments and that they need money. Armscor had competent individuals to construct and provide the Committee with an effective plan and strategic framework for ridding itself of the deficit. He sarcastically added that Armscor was out of debt and has done wonderfully in the last few months.

The Chairperson asked what was over achieved in terms of filling the employment quota. He also asked what “slow spending” is. Finally, he asked how overspending is categorized in terms of oversight.

Mr Rensberg responded that the “over-achievement” was highlighted because it was unclear. He questions how the department could employ more people than there are hired positions. It is categorized as an “overachievement” by the department, but he finds it concerning.

Mr Daniels added that “slow spending” refers to when the National Treasury cheque is spent. “Slow spending” is spending the funds after the Quarter they were intended for. “Slow spending” can have future ramifications.

Mr Gamede said that the Department cannot start spending as soon as the Quarter begins. The Department of Health and various other departments can, but not the Department of Defence.

The Chairperson asked if “slow spending” is considered financial misconduct.

Mr van Rensberg replied that it is not. However, for procurement purposes underspending in the first few quarters and then over spending in the last few quarters is problematic. This is why most spending is done in the 3^rd Quarter. It is especially problematic if over-expenditure occurs and targets not achieved.

The Chairperson said that Mr van Rensberg’s point is exactly why the presentation should be categorized according to whether or not there is any misconduct.

Mr van Rensberg explained that it was highlighted, although some “slow spending” is acceptable and it is not financial misconduct, because a large amount came into the program at the end and not enough was spent in the beginning. He feels that it is worth asking how this was managed and what was procured. 

The Chairperson requested that some issues need managerial, policy, and/or legislative intervention and that they need to be broken down by these categories. This breakdown will allow the Committee to better understand which problems to deal with and how to deal with them.

Mr Esau questioned whether or not the Committee can add questions while constructing the list.

The Chairperson said that the researchers should provide the Committee with the break-down of information, but Committee members are welcome to help if they would like.

Meeting adjourned.