Interrogation of Department of Defence 2013/14 Annual Report: Auditor-General's findings

Meeting report

Department of Defence and Military Veterans Annual Report 2013/14
Dr Sam Gulube, Secretary for Defence, introduced his delegation and informed the Committee that when he had taken over as Head of the Department of Defence and Military Veterans (DOD or the Department) , it was governed by the Defence Act and the Public Finance Management Act (PFMA). He realised that there was a unit within that Department that had more than 100 officials responsible for auditing and compliance but was struggling to establish a fully functioning internal system for an efficient audit under the PFMA. At one point, as was reported in the Auditor General’s report, budgets were duplicated and it then became apparent that a fully functioning internal audit committee had to be created.

The Secretary for Defence informed the Committee that during the financial year 2013/14 the Department of Defence relied on expert advice and support provided by the National Treasury and the Auditor-General for effective budget management. The Department's audit committee did not review the internal audit reports, financial statements, quarterly performance reports or risk management reports, nor payments from the Department's General Defence Account and Special Defence Account because no independent reviews had been performed by internal audit, due to lack of capacity.

There was not a fully functioning internal audit. This resulted into irregular, fruitless and wasteful expenditure. For example, the Department parted with R300 million as a penalty payment for a contract that was terminated due to its negligence. In another instance, the Department hired consultants who cost over R15 million.

He explained that the Auditor-General regarded fruitless expenditure as expenditure which was made in vain and could have been avoided had reasonable care been exercised. All expenditure relating to fruitless and wasteful expenditure was recognized as an expense in the statement of financial performance in the year that the expenditure was incurred. This Standing Committee had a role to play in recommending to the full Parliament whether the irregular expenditure and money paid to consultants should be approved or not.

The Department of Military Veterans (DMV) began to operate as independently with effect from 1 April 2013, and started to use the generic systems of Government, as opposed to the Department of Defence systems that had been used in previous years. Unfortunately, during this time frame, the Chief Financial Officer had been unable to execute his duties, due to ill health. Consequently, the responsibilities fell on the shoulders of junior finance personnel. The National Treasury was approached to provide assistance but could not provide the required support. The absence of leadership and guidance in the financial environment, together with junior personnel coming from various departments, was partly what contributed to the irregular expenditure.

Section 1 of the Public Finance Management Act (PFMA) defined unauthorized expenditure in two ways: either as overspending of a vote or main division within a vote; or expenditure not in accordance with the purpose of the vote for which it was appropriated.

Overspending could be referred to as expenditure under the vote that exceeded the amount appropriated for that vote, or expenditure under the main division which exceeded the amount appropriated for in that main division subject to Section 43 of the PFMA.

Irregular expenditure was defined in Section 1 of the PFMA as expenditure other than unauthorised expenditure, incurred in contravention of or that was not in accordance with a requirement of any applicable legislation.

The Chairperson interjected to ask Dr Gulube for comments on the fruitless and wasteful expenditure, overpayment to external suppliers and the R303 million rand specifically that was paid as penalty fees. Members of the Committee would take him through some questions.

Discussion

Mr V Smith (ANC) asked the Department of Defence about the fruitless and wasteful expenditure. He referred the meeting to page 211 of the Annual Report and wanted to address the penalty of R303 million that the state had paid in relation to a contract that was terminated. He asked who signed the contract on behalf of the state, whether the individual who entered into that contract that resulted into the state paying such a hefty penalty was still employed by the state, and whether any disciplinary action had been taken.

Dr Gulube explained that this contract had been awarded to an external supplier to execute, because the required solution could not be obtained inside the country. However, after the supplier had been contracted, the Department realised that it had not been fully budgeted for. The contract was for a project that was to be executed in three phases, but only the first phase had been budgeted for. Since all three phases could not be performed in accordance with the contract, it was cancelled.

The contract had an arbitration clause, which stipulated that in the event of cancellation, the parties would iron out the cause of the cancellation before an Arbitration Tribunal. The State consulted legal personnel on the best way to proceed and the Department complied with the arbitration requirement as a way of mitigating its loss. Had the State opted to proceed to litigation this would have cost it around R1 billion as opposed to the R303 347 000 figure that was finally agreed upon after a series of negotiations, during the arbitration process. This incident was reported to the National Treasury by the accounting officer in charge at the time.

Dr Gulube reported that those who were at fault in this instance had failed to inform the relevant authorities, prior to the signing of the contract, that it consisted of three phases that were to be implemented, but that not all had been budgeted for. Investigations had been carried out and a forensic audit report had been produced as a result of the investigation. The report contained recommendations which were in the process of implementation, and its contents would be released soon.

Mr Smith asked Dr Gulube for his assessment or opinion of the audit committee as presently constituted. He asked if there were any plans in place to strengthen that Committee, enable it to cover the internal audit, monitor the reports and performance. If not, then he suggested that the committee should be disbanded and another efficient committee appointed to do the job.

Dr Gulube responded that the Department was making plans to have a more capable team. The Secretary for Defence was involved and consulting with management. Recommendations for a way forward had featured regularly in committee meetings. There was progress being made in terms of having a more efficient unit that would handle reports and would have much better planning better than last year’s team. It was work in progress.

Mr Smith referred to page 198 of the Annual Report. R26 million had been paid as legal fees to a consultancy firm. Despite parting with the sum the State returned with its tail between its legs in respect of the job. He asked whether the same amount of money could have been given to a competent legal committee in South Africa, to do the same job that the external consultancy firm had done. He asked what constituted the services that had cost R216 million. He asked the Secretary for Defence to give an appraisal of whether the money that was paid to external suppliers and consultants represented value for money, and whether the work done by these consultants could not rather be done by South African nationals, instead of employing consultants.

Dr Gulube responded that although it was correct that there were some South African nationals capable of advising the State in future, they were actually still undergoing appropriate training and were thus not yet fully qualified. That was why the State had needed expert advice from someone who had wide knowledge about issues of security and management, for which it had employed an external consultant. The cry for job creation had been heard and was in the process of implementation. For example, Cuban nationals had been hired to train the militia as mechanics, and the purpose of that training was to have experts equip nationals with skills in the first place. When those experts left the country, they would leave behind nationals who not only could competently perform their duties but also train other South Africans who would be joining the army in the future. This cycle would eventually create jobs within the militia, especially for those soldiers who for one reason or another cannot be deployed.

Mr Smith noted that R26 million was what was said to have been paid. However, on page 199, there was an indication of legal costs of R14 million. One of the write-offs cited on page 198 was also "legal fees" amounting to R26 million. However, on the next page, R15 million was also written off to legal costs. It was assumed that all these write offs were to one department. He asked why "the right hand was paying a lot of money and the left hand was writing off lots of money". He asked for names of consultants paid in relation to pages 199 and 198, and which amounts exactly were written off.

Dr Gulube highlighted the fact that 80% f the money paid in legal fees was paid for the armament acquisition process. All the details would be made available to the Committee.

Mr Smith requested detail on page 202 of the Annual Report. He asked for an explanation of the item "staff debtors" and asked how this related to "damage of state property". He also asked for an explanation of what the concept of “loss of state money” listed under 11.2 of staff debtors was. He asked what had been done to avert these losses, whether the property of the culprits could be attached to recover the money. He requested that details should be given to the Committee in writing.

Dr Gulube said that the loss of state money was a big concern to any accounting officer and processes had been set in place to utilise all the available capacities to curb this issue. Defense Intelligence, Military Police and South African Police Services (SAPS) were all being employed to assist with the issue. The culprits had been identified and were under investigation by SAPS.

Mr T Brauteseth (ANC) asked how long the Secretary of Defence had had, in his possession, the forensic audit report and whether the report had been presented to the Portfolio Committee on Defence. If not, then he wanted to know why, pointing out that it was produced in July 2014.

Mr Brauteseth noted that the use of outside contractors pointed to massive lack of capacity in the Department and was worried by the statement that the State would be employing Cubans to come and train the militia, when there were surely veterans who were fully capable of conducting such training.

Dr Gulube responded that all the work being done currently was building capacity in the Department of Defence for maintenance of aircraft, and it was necessary to use Cubans to conduct the training sessions because in fact the DOD did not have its own capacity to conduct training. A number of veterans had been injured and were thus not capable of conducting training.

Ms M Mandela (ANC) asked whether the DOD was working with the Department of Labour; the latter had a database containing full details of unemployment nationals who may very well be able to perform the tasks allocated to external consultants at the moment.

Dr Gulube said that the Department planned to rejuvenate the human resources sector. The plan was to ensure that consultants would not be employed merely to do the work but there must be a substantial element of training. He stressed that when the Cubans left, the nationals would be better placed to fully complete all relevant tasks.

The Chairperson concluded the session by stating that the Members of Parliament were not against the ideology of consultancy. However, their concern was the amount of money paid to the consultants, and whether full value for money was achieved. Their main concern was that a capable state must have the capacity to function fully in all departments, and the ability to perform certain tasks, as opposed to merely employing foreign consultants.

The Committee agreed to adjourn the hearing at this stage, and not continue to interrogate the Annual Report of the Department of Military Veterans. The Committee noted that the DMV was a new department, so that it should be given time to get the books in order and then revert to the Committee when it was better prepared to explain the issues.

The meeting was adjourned.