Defence Review: briefing by National Treasury

Defence

17 March 2017
Chairperson: Mr M Motimele (ANC) and Mr B Bongo (ANC)
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Meeting Summary

National Treasury presented a briefing to the Joint Standing Committee on Defence on the implementation of the Defence Review 2015, which focused on revenue, expenditure and the main budget balance. Some of the major issues highlighted by National Treasury were the consolidated expenditure ceiling, the 2017 Medium Term Expenditure Framework (MTEF) allocation to the Department of Defence (DoD), composition of spending for the DoD and allocations to the Special Defence Account (SDA). The presentation also noted that the larger share of the DoD budget was taken up by the compensation of employees which was currently at 57% in the 2016/17 budget. On request for additional funding to implement Defence Review 2015, as presented during the 2016 Medium Term Expenditure Committee’s (MTEC) process, it was noted that the indicated request for additional funding to implement the review was unrealistic, almost doubling the current allocation of R47.2 billion in 2016/17. On allocation to the Special Defence Account (SDA), appropriation/transfer to the SDA grew significantly over the 2017 MTEF and National Treasury’s interest was to see to the alignment of the SDA’s future acquisition plans with the objectives of the Defence Review 2016.

The Committee, in response to the presentation, stated that National Treasury did not seem committed to the affairs of the DoD despite the importance of the Department in securing the borders and sovereignty of the country. With regards to SDA, no department seemed to be in charge of the oversight of the account. Although, it would seem that the oversight of the account fell within the purview of the Intelligence Committee, they confirmed that they did not have any knowledge of the operation of the account. The Committee was concerned on how the proceeds of this account would be disbursed and how it would be spent in line with milestones. The Chairperson stated that the issue of the Special Defence Account would be discussed in another meeting since National Treasury seemed to not be in a position to furnish any information on the account.

On United Nations (UN) reimbursements, the Committee stated that whilst the funds expended for the peacekeeping were usually from the DoD, the reimbursement from the UN were usually sent to National Treasury who always seemed very reluctant in releasing the funds to the DoD. On exit strategy, National Treasury implied that there were already identified reforms that would free resources towards the implementation of the Defence Review objectives, but there seemed to be unwillingness on the part of the DoD in implementing the reforms. The Committee requested for further clarification on these reforms and the reasons for DoD’s unwillingness to implement the reforms. The Committee emphasized that National Treasury must act with urgency in resolving the issues that concerned the DoD, considering the DoD’s constitutional obligation to protect the borders and the sovereignty of the country.

Meeting report

Briefing by National treasury

Dr Rendani Randela, Chief Director: Justice and Protection Services Unit, National Treasury, presented the implementation of the Defence Review 2015 to the Committee and informed the Committee that the fiscal framework of the review focused on revenue, expenditure and the main budget balance. He stated that the lower nominal GDP and tax revenues resulted in a slightly wider main budget deficit over the medium term.

On the consolidated expenditure ceiling, he said that given the lower-than-projected economic growth and revenue collection, Government proposed expenditure reductions of R10 billion in 2017/18 and R15 billion in 2018/19 budget. In the 2017 budget, further reductions of R10 billion in 2017/18 and R16 billion in 2018/19 were proposed. Moderation in employment levels would also be required across Government as compensation crowded out spending on essential items in budget baselines. The adjusted appropriation for total compensation of employees ceiling for National Government in 2016/17 was the sum of R148 billion and would increase (based on medium term estimates) to R175 billion in 2019/20.

On the composition of spending for the Department of Defence (DoD), he said that the share of compensation of employees’ expenditure to total Defence expenditure grew from 39.3% in 2001/02 to 57% in 2016/17. It was estimated to stabilize around 54% over the 2017 MTEF. The current macro-composition of the budget was unstainable given limited funds for other discretionary spending items to modernize the South African National Defence Force (SANDF). The Defence Review 2015 required composition to be 40:30 and this realignment should be driven by Defence.

He also said that following the trend in personnel numbers for Defence, the personnel numbers would remain constant at 77 597 over the 2017 MTEF and this would continue to put strain on compensation of employees’ budget over the 2017 MTEF.

He also noted that the background on the Defence Review 2015:

The Defence Review 2015 mapped out the direction of the Defence would take over the next 20 to 30 years and provided for the following critical milestones:

-Milestone 1: arrest the decline in critical capabilities through immediate and directed interventions

-Milestone 2: recognize and rebalance the Defence Force as the foundation for future growth

-Milestone 3: create the sustainable Defence Force that can meet ordered Defence commitments interim end-state of the Defence Review)

-Milestone 4: Enhance the Defence Force’s capacity to respond to emerging threats  (final end-state of the Defence Review)

-Milestone 5: defend the Republic against an imminent or dire threat

The understanding of National Treasury was that the first two milestones were planning milestones. These involved the development of an implementation plan and implementation of reforms to arrest the decline in critical capabilities and reorganize the Defence Force as the foundation for future growth. It was only in milestone 3 where there was a need to create a sustainable Defence Force that could meet ordered commitments and where requirements for additional funding may be considered by the Medium Term Expenditure Committee and Cabinet after reorganization and reforms were implemented.

On request for additional funding to implement Defence Review 2015, as presented during the 2016 MTEF process, he said that the indicated request for additional funding to implement the review was unrealistic, almost doubling the current Defence allocation of R47.2 billion in 2016/17. Also, in adopting the Defence Review 2015, Parliament recommended that Defence should give assurance on including total cost estimations for each milestone. The MTEF also recommended that Defence should develop a proper implementation plan and costing for each milestone of the Defence Review 2015. A task team between the Department of Defence and National Treasury was formed with its primary objective being to examine the implementation, costing and funding of the Defence Review 2015.

On allocation to the Special Defence Account (SDA), he stated that appropriation/transfer to the SDA grew significantly over the 2017 MTEF and National Treasury’s interest was to see to the alignment of the SDA’s future acquisition plans with the objectives of the Defence Review 2016. He also said that the current policy issues were dealing with pressure on compensation of the employees, personnel reduction versus rejuvenation of the SANDF, increasing ordered commitments and tight fiscal space, conditions of service-retirement at the age 65 years and retention of United Nations reimbursements.

In conclusion, he said that the Joint Standing Committee on Defence should consider requesting the Department of Defence to provide its implementation plan and costing of such plans to the Committee for interrogation. He also noted that the DoD was currently developing a funding model for traditional and non-traditional means of funding and this was yet to be shared with National Treasury. He also noted that there seemed to be unwillingness from Defence to implement reforms that could free resources towards the implementation of some of the Defence Review objectives e.g. Implementation of an exit mechanism for undeployable SANDF members.

Discussion
The Chairperson thanked National Treasury on the presentation and reiterated that the Committee dealt with the issues related to the DoD and had to focus on the requirements from the DoD by National Treasury and when the Committee interacted with them they would be clear on the requirements by National Treasury.

Mr S Marais (DA) commended the Department on the presentation and asked on the issue of the 2017 MTEF allocation to the DoD, if there were any interrogation of the programmes to ensure that they fit into the narratives of the DoD. On the milestones, he noted that in 2016, it was reported that 2 packages would be looked at and wanted to know what could be done with the packages under the current budget allocations and other packages that did not fall within the current budget allocations. He also stated that there seemed to be no clarity between the National Treasury and DoD on the milestones and packages. In the 2015 Defence Review, he noted that the prices used were obtained in 2014 and 2015 and wanted a confirmation that these were the best prices and also a clarification on how National Treasury arrived at the prices since there were usually increases in Consumer Price Index (CPI) which were totally different from military price index. According to him, the military price indices were usually between 15% to 20% increase because of the cost of importation of the military equipment.

In terms of SDA, he stated that no department seemed to be in charge of the oversight of the account. Although, it would seem that the oversight of the account fell within the purview of the Intelligence Committee, but they confirmed that they did not have any knowledge of the operation of the account.  He stated that his concern was that if the proceeds in the account would be spent in line with the milestones. He noted that even the Auditor-General stated that he could not give any opinion on the SDA.

The Chairperson stated that the issue of the SDA would be discussed in another meeting since National Treasury seemed not be in a position to furnish any information on the account.

On National Treasury current policy issues, Mr Marais asked for more information on the undeployables under 45 years and above 45 years and if these undeployables could be split into their various ranks to enable the Committee to determine the differences in number between senior officers and foot soldiers.

Also, on United Nations (UN) reimbursements, he stated that whilst the funds expended for the peacekeeping came from the DoD, the reimbursement from the UN were usually sent to National Treasury who always seemed very reluctant in releasing the funds to the DoD. He asked for clarification on the resolution of this issue by National Treasury. He also stated that the country was paid by the UN on the serviceability of the equipment used in peacekeeping but would not be paid if the equipment did not meet the specifications from the UN. He stated that there was reports that the equipment was not designed according to required specification and money was rarely disbursed for acquisition of the equipment that met the specific requirements. He suggested that if the South African Government strategically wanted to be involved in peacekeeping on the continent, the funds needed for these equipment must be disbursed first before the equipment was designed in other to ensure that the DoD would be paid.

On exit strategy, he stated that National Treasury implied that there were already identified reforms that would free resources towards the implementation of the Defence Review objectives but there seemed to be unwillingness on the part of the DoD in implementing the reforms. He also said that National Treasury only referred to human resources in their reforms, whereas their statement was a generalized one and that National Treasury should highlight on other areas where they proposed some reforms. He stated that this was huge concern if the DoD was unwilling to implement these reforms. 

Mr S Esau (DA) asked National Treasury whether the recent engagement with DoD started in 2015 or 2016. He also stated that he was concerned with the exit mechanism whereby National Treasury issued a directive that 10 000 employees should be retrenched because of the current budget constraints and this was yet to be implemented. He said that National Treasury did not seem committed to this exit strategy as there were no disbursements of money from National Treasury for the exit compensation. He stated that there were reports that there were soldiers who were not employed even after their training and that the DoD may be blamed for this but National Treasury seemed not to be committed either although they seemed to have lots of ideas.

He said that more money was needed to finish the healthcare of soldiers which was in a very bad state at the moment and wondered if National Treasury were really concerned about the welfare of the soldiers. On the UN reimbursement, he emphasized the reimbursement was not a contingency fund and must be returned to the DoD. On the milestones and packages, he stated that the Committee’s understanding was that each milestone came with packages but if there was any confusion with regards to the packages and the milestones, the issues must be sorted out beforehand between Treasury and the DoD. He also asked if National Treasury and DoD were all involved in the drafting of the Defence Review.

He said that National Treasury must act with urgency in resolving the issues raised as it would seem that the DoD was not treated appropriately. He also asked the reasons behind the DoD’s unwillingness to consider the options proffered by National Treasury for implementation of the Defence Review. He sought for clarification from National Treasury on the sum of N43 billion that was reflected in the presentation as this sum was never brought to the notice of the Committee. He also asked National Treasury to confirm if there were any economic benefits of these peacekeeping missions to South Africa.

Mr B Bongo (ANC) noted that the Committee was dealing with very dire situation and that the DoD had the constitutional obligation to protect the borders and the sovereignty of the country. He stated that National Treasury was requested to attend the meeting and explain to the Committee if their engagement with the DoD always highlighted the urgency that the DoD required. He noted blame for the delay in the exit strategy lied with National Treasury as soldiers would not be exited from the system without adequate plan or compensation. He stated that considering the uniqueness and importance of the DoD, which may even be seen as the second government, the Department required a lot of funding for its success. He asked National Treasury if there were available funds earmarked to fund the Department especially the Defence Review.

Mr J Skosana (ANC) said that on the issue of the exit strategy of soldiers due to ill health or old age, there was an outcry in the DoD as a lack of backup plans in replacing the soldiers that were leaving the Department. He asked National Treasury if the budget allocated to the DoD was adequate for the operation of the Department and was the funds merely to sustain the Department.

The Chairperson said that National Treasury in their response should respond specifically on the issue of funding and reimbursement of funds from the UN. He emphasized that the Committee’s position on the reimbursement remained that the refund must be sent back to the DoD.

Dr Randela stated that the engagement being referred to was merely the formal structured engagement with terms of reference which would be signed by both parties. He further explained that the Department was dealing with most issues related to the budget process and were involved with various issues such as the pressure on compensation of employees long before the Defence Review was approved.  On the issue of the defence budget, he said that the biggest driver of the budget was compensation which took up to 57% of the budget followed by goods and services. He stated that the compensation was high because of the number of undeployable soldiers in the system.

On the in issue of the calculation of the best prices for the military prices indices, he said that the calculations were done by the DoD and not National Treasury. He said that National Treasury was not involved in the drafting of the Defence Review. He stated that National Treasury did not have further information on the split according to the ranking of the officers but merely had information on the split according to the age category.

On the UN reimbursement, National Treasury noted the Committee’s concerns and said that Treasury did not oppose the reimbursement as this was a technical issue as the revenue generated by the country were automatically credited to the National Treasury. He stated that the issue would be reviewed and the outcome would be communicated to the Committee.

On the unwillingness of the DoD to implement some of the reforms suggested by National Treasury, he stated there were a series of meetings at various levels up to the Directors-General levels between National Treasury and the DoD on some of the options suggested. He highlighted the issue of voluntary retirements where National Treasury requested from the DoD for a number of soldiers that would voluntarily retire if the option was made open to them. The Department also requested from the DoD the number of soldiers that would be affected by the exit as this would affect the fiscal cut. He informed the Committee that the DoD’s response was that none of the soldiers were willing to voluntarily retire or exit and insisted that the options were not favorable to them and also failed to give a valid reason for the rejection of the options. They merely insisted that that their reason was due to political considerations. National Treasury also requested the DoD to give them options that were favorable to the DoD.

On funding of the DoD for the implementation of the Defence Review, he stated that the funds requested from the DoD were not readily affordable and it would help if their budgets were broken down to enable National Treasury determine the ones that would be accord priority in execution. On the issue of milestones and packages, he stated that National Treasury always worked with the milestones but were notified of the packages two weeks before the meeting by the Defence Force.

Mr Mashudu Bidzha, Director: Defence and Military Veterans Unit, National Treasury, said that it was aware of the needs of the DoD as well as its importance to the country and currently engaged the DoD on a very honest basis. He stated that because of the tight budget that was being maintained, it might be mistaken that the policies of the DoD were not being taken seriously but Treasury was trying to strike a balance between them and the DoD and push for the implementation of the policies that were of utmost importance.

On the issue of the additional monies to the budget especially the sum of N43 billion, Dr Randela said that the inconsistency would be resolved with the DoD and then communicated to the Committee. He also stated that peacekeeping in some parts of the continent that ensured stability in the continent contributed to the economy of South Africa. He cited an example of the anti-piracy in Mozambique which ensured stability on the continent.

On the reforms proposed by National Treasury, he stated that the reforms were not restricted to the human resources and he merely highlighted a few of these reforms in his presentation.

The Chairperson thanked National Treasury and also noted that the Department may be called for any further clarification that may be required by the Committee. He also noted that at a certain stage the task team must be called to give the Committee a broader overview of the presentation.  

The meeting was adjourned.

 

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