Department of Defence: hearing

Meeting report

STANDING COMMITTEE ON PUBLIC ACCOUNTS
5 March 2003
DEPARTMENT OF DEFENCE: HEARING

Chairperson: Mr F Beukmann (NNP)

Documents handed out:
Department of Defence Annual Report 2001/2002:

Present:
Mr J. Mr Masilela, Secretary of Defence
Mr S. Fakie, Auditor General
Mr J. Mr Grundling, Chief Financial Officer, Department of Defence
General M Brand, Human Resources
Major General T Ntsibande, Chief Logistics Officer

SUMMARY
The Department of Defence responded to questions from SCOPA Members on the 2001/2002 Report of the Auditor General on the Department. Members were presented with the draft of the Department of Defence's financial statements which were not issued to media and members of the. The discussion revealed serious shortcomings in DoD accounting procedures. The Auditor General warned that he might again find it necessary to qualify the report. force design? The Department said that the force design is unaffordable despite the recommendations of the Defence Review. They suggested that Cabinet must take other actions to reduce force structure through transformation in order to enable the DoD to remain in line with the budget allocated by Parliament.

MINUTES
Mr Masilela: The DoD is taking into account the thirteen SCOPA recommendations on force design, and other measures are to be taken to reduce the costs of stores and administration. We have involved Armscor to assist in addressing these issues.

Mr Bruce: To what extent does the National Conventional Arms Control Council (NCACC) impact on stock levels, and the sale of arms? What about environmental impacts of dumping?

Mr Masilela: Environmental factors and the NCACC do impact on these disposals. There are many countries to which we cannot sell ammunition, and we are mindful of these guidelines.

Mr Bruce: Have you been able to determine your minimal stock levels?

Mr Masilela: Part of the project assigned to Armscor is to reach these determinations.

Mr Bruce: How do you determine book values of stores? Are you still applying the 1930 legislation?

Mr Masilela: This remains difficult, and I shall defer to the chief accounting officer. We are still using accruals, and this is problematic. We are still using accruals, and this is problematic. We are working on interim systems with IT requirements and systems.

Mr Grundling: At the moment the accounting policy is a cash system. Therefore as soon as an item is paid, it is written-off.

Mr Bruce: Chapter 9 of your report refers to the reduction of stocks, and the revenue earned of R250 million on sales against a book value of R3.4 billion. This looks like a panic fire-sale.

Mr Grundling: This refers to the 24 transactions of aircraft and related spares. It is a perfect example of the book value of R3.4 billion paid for 20 to 30 years ago, but not depreciated over time. It is not a panic fire-sale, but reflects the cash-system on which the DoD operates.

Mr Bruce: In other words, until you change your accounting practices, there is nothing you can do for three to four years?

Mr Masilela: Our stores are valued at R70 to R100 billion, but this includes World War One equipment. We are making tremendous strides in reducing these.

Mr Grundling: Moving from cash to accrual is being led by the National Accounting Standards Board that has a three year programme to revise government accounting procedures. We are therefore not in control of these arrangements, but must defer to the Board. We also hesitate about getting rid of stores given the uncertainties over acquisitions.

Mr Nair (ANC): We were assured by the DoD that asset registers would be compiled. Your explanations do not absolve you from keeping asset registers. We went over this exercise before, and we were assured that this would be done.

Mr Grundling: The DoD has asset registers for the South African Navy and South African Airforce and the Army and Medical Corps are still implementing these. They are still examining the original purchase prices of their equipment.

Mr Chiba (ANC): The Auditor General made recommendations in his report. This Committee is not happy with the DoD's implementation. From these explanations, it seems that the estimated stocks of R70 to R100 billion are now only worth about R7 billion. When will your Department be ready to work on an accrual system?

Mr Masilela: The actual value of the stocks of R70 to R100 billion does not reflect depreciation or age, and the value on the open market is much less. We will try to determine the current values.

Mr Grundling: When Pricewaterhousecoopers audited the stocks, they came to the estimates of R70 to R100 billion, but we do not have an agreed standard of depreciation. The Secretary of Defence has decided that we either await the National Accounting Standards Board or devise our own standards. Therefore, over the next six months we will look at foreign practices and will make recommendations to the National Treasury to modify the standards to DoD situations. Although the rest of the State may struggle over the next three years, we hope at DoD to be ready before the rest of the National Accounting Standards Board.

Mr Shauket Fakie: The issue now is that of the decline in value of stocks. What was the basis of the stock valuation of R42 billion?

Mr Grunding: To be honest, I do not know because we do not have a policy on depreciation. I will endeavour to find out how the R42 billion figure was determined.

Mr L Chiba (ANC): As of 31/3/2002 the DoD refers to stocks at R42 billion, but there seem to be major differences in stock levels. By when will the Log-ice system be implemented, and will it resolve the problem?

Major General Ntsibande: Only at the units that are fully computerised, but not at the commando units. We have a very big problem.

Mr Chiba: So you cannot assure SCOPA that in three years time the problem will be resolved. This is highly problematic.

Mr Masilela: There have been problems with the various arms of the SANDF, and although the SAN and SAAF are further advanced, we do not know about the Army or SA Medical Service. Within a week we will advise target dates.

Mr Chiba : What percentage of units is computerised? How does the DoD intend to reconcile the manual and computerised systems? If the Army and SAMS are 0% computerised, how can the DoD make informed decisions? Why did these arms of service not comply with your instructions?

Mr Masilela: We will come back to you within a month with explanations.

Mr Chiba: Five years have elapsed since the Auditor General reported on excessive stock levels. We as a Committee must make recommendations on why such little progress has been made over five years.

Mr Vezi (IFP): We note that the SAAF has been able to dispose of R350 million of equipment, but how far have you proceeded with disposals?

Mr Masilela: We have engaged Armscor to auction or otherwise sell this surplus equipment. The SAN is ready to dispose of its minesweepers and strikecraft, and the SAAF is ready to dispose of aircraft.

Mr Vezi: What progress has been made with recovery of medical overpayments, and what assurances can you provide SCOPA that these shortcomings have been addressed?

Mr Grundling: I can report that the debtor system is now live, and that manual systems are being computerised. I can assure SCOPA that this is in hand.

Mr Vezi: The Public Finance Management Act establishes auditing standards, but the annual report does not include a report on risk management by the DoD.

Mr Masilela: My apologies that the Audit Officer is not here, but the DoD is now fully functional on the PFMA, and a working group is implementing risk management in terms of our resources.

Mr Vezi: What about the violation of tender procedures?

Mr Masilela: We take this very seriously, and we no longer accept excuses. There are cases before the courts, and we await the outcomes.

Mr Gerber (ANC): SCOPA notes that internal controls on leave were inadequate. Have you determined whether these are management or administrative problems, and what have you done to remedy this? Can you assure us there will be no loss of public funds?

Mr Masilela: Some of these problems are at management level by unit commanders, but data is also not properly captured by computers.

General Brand: I really wish we could get the leave administration in place. We have prioritised two main issues, but the administration of leave is a multi-functional matter and we need management and skills training. By 31/8 we will have a booklet detailing how leave is administered, and new controls should solve the problem. At 31/12 there will be checks on the effectiveness of these measures, and any infringements will be taken into account in promotion considerations.

Mr Gerber: The sum of R3.75 million was received in local and foreign aid assistance, but no auditing statements could be provided. The donors expected accounting responsibility, and the lack of auditing may jeopardise future donations. What has been done, and why hasn't a previous SCOPA request been complied with?

Mr Masilela: The payment from a foreign donor refers to the Mozambique floods.

Mr Grundling: We need to distinguish between foreign aid in cash and in kind. We do not have a system or policy to make this distinction but we intend to have this by June.

Mr Fakie: When foreign donors provide funds or donations in kind, they include conditions. Unless the DoD can get the donors to relax the conditions, we will have to issue a qualified audit.

Mr Gerber: The information regarding land and buildings does not correlate with Department of Public Works records. Which Department is at fault regarding asset registers on land and buildings, and when will this be corrected?

Mr Ntsibande: Public Works insists we are not supposed to have a register as they are the sole custodians of land and buildings. The DoD has created a register because of the vacuum at Public Works. We are only the end users although they are the custodians.

Mr Gerber: Can you confirm that all the facilities used by the SANDF are owned by the Department of Public Works? What about holiday resorts owned by the SAAF?

Mr Ntsibande: The services have been given funds to support the morale of staff. The SAAF holiday resorts are not reflected in government asset registers. They are private.

Mr Gerber: What about the Army and Navy? Do they also have holiday resorts? Page 144 suggests that little has been done since 1995 to improve the situation at the Service Corps. The mandate is still uncertain. This is highly unsatisfactory. Does the expenditure so far have to be written-off as fruitless and wasteful expenditure?

Mr Masilela: Yes, the Service Corps is a serious problem. The mandate is uncertain, and a series of workshops is now considering the future of the Corps. The Service Corps will have to be transformed into a resettlement agency of the DoD. The training facilities will have to be transferred to the DoD, but we cannot use all the facilities though we do need to assist members. The Service Corps were envisaged as a big training facility for the unemployed, but we could not meet the Cabinet's mandate. There has been fruitless and wasted expenditure. We have had to stop the computer and other training.

Mr D Gumede (ANC): The Auditor General reports that he is unable to settle the Special Accounts on Medical Expenditure. Why have financial statements not been made available to the AG, and what procedures have been put in place?

Mr Grundling: This Special Account covered medical assistance in African countries which was terminated two years ago, but is a sensitive issue for the DoD. A property in an African country will be auctioned before 31/5/2003.

Mr Gumede (ANC): Page 184 refers to a compliance programme between the United States and South Africa, and an amount of R14 million. What has happened?

Mr Masilela: There has been a problem with this account, but this is under the domain of the NCACC. We are working on this with Mr Minty of the Department of Foreign Affairs. A business plan and a constitution have been established. DoD never had control over these funds.

Mr Fakie: According to our audit, it comes under the special funds of the DoD. If this is under the control of the Department of Foreign Affairs, the fund should be transferred.

Mr Gumede: The Special Defence Account identified Armscor in 1998 as having paid R12.6 million in commissions as 48% of the sale price on Puma helicopters. There is also the matter of the Pilatus training aircraft. What steps have been taken to recover these funds?

Mr Grundling: Regarding Puma, the investigation is complete, and the report noted that Advocate Bredenkamp has decided not to proceed with criminal prosecutions on the basis of insufficient grounds. Regarding the Pilatus aircraft, the Scorpions advised on 25 February that Advocate McCarthy is assessing how to proceed with prosecution.

Mr Nair: The report shows unauthorised expenditures in previous years from 1994 and years following of R448 million. In 1997/98 an amount of R428 million was unauthorised in the costs of integration. Cabinet declined to approve this expenditure. What goes on within DoD to control such unauthorised expenditures before it comes to the attention of the Auditor General and subsequently SCOPA?

Mr Masilela: This is a key matter with DoD.

Mr Grundling: We have rearranged financial management so that each expenditure receives committee authority, including a Finance Authority who has a veto and who informs the Minister and myself. We do not overspend our budget. The R448 million was a consequence of R1.4 billion being cut from our budget.

Mr V Smith (ANC): There are many explanations for discrepancies in moving from cash to accrual systems, but in this environment the temptation for theft is rife. What are you doing at DoD to minimise the physical theft of arms and ammunition? In 2001 SCOPA noted the Joint Investigating Team report that officials had departed from prescribed conduct and tendering procedures. Are the JIT recommendations being implemented? Please update SCOPA on what you are doing.

Mr Masilela: We have a detailed report on the JIT recommendations that we will submit to you. We are constantly monitoring the problem of thefts.

Mr Bruce: What impediments exist in the force design?

Mr Masilela: It is unaffordable despite the recommendations of the Defence Review. Cabinet must take other actions to reduce force structure through transformation in order to enable the DoD to remain in line with the budget allocated by Parliament.

The meeting was adjourned.