Current budget shortfall: DOD & National Treasury briefing; Department of Defence 2018/19 Annual Report; with Deputy Minister

Meeting report

Opening and Welcome

The Chairperson opened the meeting by taking participants through the items on agenda. He commented that the economy had done well in the past few years, and the discussion should occur in the context of the economy of the nation and the constitutional mandate of the Department of Defence.  He welcomed Mr Thabang Makwetla, Deputy Minister of Defence and Military Veterans, and the delegations from the Department and National Treasury.


DOD financial challenges: Briefing by National Treasury

Dr Rendani Randela, Chief Director, Public Finance Division, National Treasury (NT) said that the 2015 Defence Review was meant to provide a defence policy that was supportive of the government’s priorities and strategic intent, and to determine the defence force design and structure as a well as the future resource framework. Over the long term, the Review proposed that defence spending be 2% of the gross domestic product (GDP). It mapped out the direction the Department of Defence (DOD) would be taking over the next 20 to 30 years and provided five critical milestones on the one hand, and three strategic policy options on the other. The Review proposed the 40:30:30 ratio for personnel, operations, and capital budget. It further provided a plan to arrest the decline. This was approved by the Minister of Defence, who provided a Ministerial Directive. In response to the Directive, a process of developing a funding model for the DOD was started. The funding model findings were to serve as inputs to the budget task team (BTT). The focus of the work of the BTT was to determine what would be feasible and executable over two medium term expenditure framework (MTEF) planning cycle periods.

Dr Randela talked about the Review cost estimates. During the first six years, implementation of the Review focussed on key Milestone One -- arresting the decline in critical defence capabilities through immediate, directed interventions. If implemented in full, the Review would require an additional R53.3 billion for defence expenditure over the next six years. Although Work Package Five remained important, the priority for additional funding ought to be directed at achieving Work Packages Three and Four. Given the constrained fiscal outlook, not all elements of the Review could be funded as required. The Defence Force had, as recommended by the Task Team, to retain revenue generated from United Nations (UN) re-imbursements. The Department of Defence’s baseline grew from R50.5 billion in 2019/20 to R52.8 billion in 2022/23.

On the composition of the defence budget, Dr Randela said that the share of compensation of employee (CoE) expenditure to total defence expenditure had grown from 39.3% in 2001/02, to 55% in 2019/20. CoE continued to be the largest expenditure item over the 2019 MTEF, spending on which accounted for a projected 57.1%. The current macro-composition of the budget was unsustainable, given the limited funds available for discretionary spending items to modernise the defence force. During the 2016 MTEF, the Cabinet had approved CoE budget reductions of R1.9 billion in 2017/18, and R2.9 billion as part of the aggregate expenditure ceiling. These reductions had carry-through effects. In 2018/19, the DOD overspent its CoE budget by 2.9 billion and had a projected pressure of R2.7 billion in 2019/20. About R3.2 billion shortfalls on CoE was projected for each year of the 2020 MTEF. Despite the declining trend in regular force numbers, CoE pressure remained. Over the 2019 MTEF, the Department would maintain an average personnel strength of 75 000 and utilise 2 693 048 reserve force mandays.

Dr Randela spoke about the realities and challenges. The DOD faced a constrained fiscal environment, departmental baseline reductions, and defence modernisation. It dealt with pressure on CoE, and the impact of long and open-ended peace keeping missions on the budget. There was an increase in ordered commitments within a tight fiscal space.

Dr Randela concluded by stressing that given the constrained fiscal outlook, the Review was unaffordable. There was a consideration to fund critical elements of the Review through retention of revenues such as UN reimbursements, and the sweating of defence assets. The National Treasury had released an incentive framework for the retention of revenue by departments.

Discussion 

Lieutenant General Vusi Masondo, Chief of Staff: South African National Defence Force (SANDF) said that the part of the brief presentation that had referred to the DOD’s challenges, had been developed from the perspective of the National Treasury. He agreed with the other parts of the presentation.

Dr Sam Gulube, Secretary: Defence and Military Veterans, SANDF, said the Department’s different programmes included administration, force employment, landward defence, air defence, maritime defence, military health support, defence intelligence and general support. The National Treasury was sometimes not clear from which programme the budget could be reduced or increased. It was important to highlight that the percentage of GDP allocated to the defence was of major concern. The defence force played an important role in the southern region to ensure that South Africans and the region were safe. The question was what defence South Africa wanted, regardless of how the economy performed. What percentage of the GDP should be allocated to the defence budget? No other neighbouring country allocated less than 2% of the GDP.  Their allocations were Namibia (4.4%), Botswana (2.7%), Angola (3.5%), Lesotho (3%), Swaziland (2%) and Zimbabwe (2.7%). There was no country in Africa that allocated a defence budget of below 1% of the GDP, except South Africa.

The allocations on the CoE were reduced in 2015. 55% of the defence budget was allocated to CoE. Despite the fact that the defence budget was reduced, the number of employees was increased. Another risk was related to 2015 Defence Review under which the plan to arrest the decline was developed and had to be implemented. This did not happen. Instead, matters went from bad to worse. By 2019, the decline had not been arrested.

The Deputy Minister said that there were many issues to be elaborated on. However, he proposed to withhold his comments for Members to engage with the presentation and comment after their engagements.

Lt Gen Masondo commented that he understood that the decision to introduce the ceiling on CoE was one of the strategies of the NT to force the DOD to do something. The CoE ceiling could not cover the compensation of existing employees. There were misconception and confusion that the DOD was not meeting the recommendations of the Treasury relating to the deployment of soldiers in peace keeping missions. The families of soldiers who died on peace keeping missions were not compensated. Members should understand that soldiers would not be deployed for more than six months. After six months, they had to undertake military training. Deployment of soldiers for more than six months created problems, as they could not be with their families. Other problems were related to the claims of the United Nations (UN) that South African soldiers were engaging in sexual exploitation and abuse. CoE could not be reduced and expect things to be normal. Soldiers could not be fired and sent on to the streets in the country, where the crime was so high. One would not hesitate to state that crime would increase if soldiers’ employment was terminated. That was why the Defence was trying to negotiate with the National Treasury to fund the CoE.

The number of soldiers had remained the same in order for the Defence Force to discharge its constitutional mandate or ordered commitments. The increase in the age of retirement, from 60 to 65, was due to the integration the defence had gone through. The military system was looking at having different people at all levels. These were issues that started in 1994. The issue of boots on the ground versus modernisation was not something that could happen overnight. Firstly, there was a need to invest in modernising the capability prior to reducing the personnel. For the past few years, an adjustment of salaries was on the table for discussion every time. The salary was not negotiable. It had to be paid or the work or operations would suffer. It appeared that the National Treasury was inviting the Department of the Defence to go to early retirement without the rejuvenation.

The Chairperson said that the presentation was very technical. It acknowledged that the DOD was facing a serious financial challenge, and asked the DOD not to surrender even if the budget stayed the same and was not increased.

Mr S Marais (DA) said that the last two slides talked about the realities and challenges faced by the Defence Force. He suggested that there should be a workshop on those problems with a view to finding solutions. Problems had been found and presented to the Committee, but no solutions had been suggested by the National Treasury. The brief presentation appeared to indicate that there were two competing voices. This would lead to questions about where the mandate of the DOD or the Defence Force came from, and how such a mandate could be implemented. There was one state and therefore there should be one voice. If the Department was striving to discharge the mandate from the state, why did the National Treasury seem to have a different view of the mandate? Perhaps, the problem rested on the interpretation of the mandate. Did the National Treasury have its own understanding of the constitutional mandate of the Department? Extra allocations were needed to cover the exit system.

It was reported that inflation had not been included in the 2015 Review and that the requirement had been determined in real terms on 2016/17 prices. What had the National Treasury done in order to deal with the challenges of inflation? Had it conducted a study on reasons why South Africa was not getting reimbursements from the UN? It was a prerequisite to protect SA’s economy, so what was the National Treasury doing to ensure that the Defence Force was an institution capable of protecting the economy? There was a plan to increase the salaries of employees, which had been approved by the Treasury. On top of this, the Department did not have the power to stop salaries from increasing. Why had the Treasury approved increases in salaries, but had been cutting the compensation of employees in the Defence Force?

Mr T Mmutle (ANC) remarked that it was unfortunate that the National Treasury had not taken the invitation seriously. The decision-makers from the Treasury had not attended the meeting. Who would take the decisions in their absence? On the issue of introducing a ceiling on DoE and the imposition of a reduction, he sought clarity on what the perspective of the National Treasury was. Did they imply that the salaries of employees should be cut? How could such a position even be considered if due regard was given to the current situation of the high rate of employment? How did the Treasury intend to assist the Department to deal with the challenge of the retrenchment of employees?

Referring to the defence baseline growth, he asked about the Department’s baseline budget, which grew from R50.5 billion in 2019/20, to R52.8 billion in 2022/23. This was an insignificant increase.  If the Treasury agreed with the Committee, they would fund aspects of 2015 Review. In the view of the Treasury, what would be essential aspects under 2015 Review that could be funded? How were other countries doing in terms of allocations of percentages of the GDP to their defence budget? It was unbelievable that South Africa was sitting below of 1% of GDP. There was a need for political will to change the allocation of budget to the defence force. Decision makers of the Treasury should be invited and be told of the concerns of the Committee, and why it was important and necessary to fund the defence force. How could the growth of economy be boosted and ensured without protection? The economy was at grave risk because it was not protected. If the nation was not in full control of its borders and thus national security, how it could be said that the economy was secured? Security of economy ought to be ensured.

The Chairperson commented that he was worried about reductions of the budget, in particular the cutting of allocations on the compensation of employees. He asked whether the Treasury was proposing further cuts in the future.

Dr Gulube confirmed that the Treasury would be cutting the budget of the defence force further. It had sent a letter which requested the Department to cut its budget. There would be a cut in 2021/22, and this would have a serious impact on the performance of the defence force. A 5% cut in the budget had been proposed. Since 2012, the budget has been decreasing in real teams. The cuts had been implemented by the Treasury, and would still be implemented. The SANDF operations had been placed at a grave risk. Of concern was that the Department would not be able to pay its suppliers. As a result, it would be sued. The Department would not be able to litigate simply because there would be no budget. His main concern was that the suppliers might not be paid or not be paid in full, and thus would take the Department to court.

Ms A Beukes (ANC) said that she did not see a timeframe relating to monitoring and evaluation. She added that Lt Gen Masondo knew what would work for the defence force. He knew what the problems were, which was why there should be engagements between him and the Treasury.

Mr Marais said that he was concerned with the effect of a lower budget on the defence industry. The defence industry could not perform in a way that would contribute to economic growth. The reduction of the budget would reduce the capability of the defence force and the production of the defence industry, such as military equipment. 

The Chairperson invited the Treasury to respond.

Dr Randela responded that budgeting was all about making a choice about what one would like to spend on. South Africa could not compare itself to Namibia, Zimbabwe or Angola simply because South Africa had made a choice to spend on socio-economic aspects, such as building houses for citizens. Those countries were not spending on socio-economic elements. South Africa had made a choice. The mandate of the SANDF or the Department was not disputed. It was clearly set out in the Constitution. The reality was that the Treasury could not allocate money inconsistent with South Africa’s choice to spend. Put differently, the Treasury did not have the proposed budget, unless another choice was made. There was a fiscal framework in which the Department should work. The Treasury was not targeting the SANDF or the Department, as the budget cuts were affecting all departments. Yet, there was a constitutional mandate which ought to be separated into strategic objectives and then priorities. There were national priorities. Those priorities were set out by the Department of Performance Monitoring and Evaluation (DPME), and were considered when allocating the budget to departments.

On the extra allocations for the exit system, Dr Randela responded that this matter had been dealt with since 2016. However, the exit policy was not sustainable, as it relied on a voluntary mechanism. There was a need to balance the intake and natural attrition as part of dealing with compensation pressure. There had been an engagement with the SANDF on how much they could afford when they went with small or big retrenchment. This issue needed to be discussed, to bring it in line with the rejuvenation strategy.

On the question of adjusting the budget, Dr Randela responded that this was done on the basis of the consumer price index (CPI). A middle ground position was found in order to adjust the budget from time to time.

On the issue of not taking the invitation seriously, Dr Randela responded that the Treasury took the invitation seriously, as they engaged at various levels. Comments and inputs from Members would be taken seriously by the Treasury. He welcomed the suggestion that the Committee should raise the matter with the Office of the President if they would like to amend the current allocation of budget to departments. The ceiling on compensation was not something new. It was historical. It had been introduced in 2016, to be precise.

On the boots on the ground versus modernisation, Dr Randela said that the Treasury was not concerned with the number of soldiers, but the effectiveness of the SANDF. In dealing with personnel related challenges, the main question was: what should be career pathways for soldiers to ensure rejuvenation of the Defence Force?

The Chairperson commented that it appeared from interaction that the Committee and Treasury would not find each other, and the Committee would have to make its own recommendations to Parliament.

The Deputy Minister responded that the state had one voice. The questions posed were very difficult to respond to. It was a dereliction of duty not to fund the defence force effectively. It was essential to have a modernised, effective and disciplined defence force. The strengths of the defence force were not based on numbers in modern times.  The greater the amount of the budget that was allocated to the compensation of employees, the greater the performance. If there was no adequate defence budget, there would be an army without skills, expertise and equipment. Without being equipped with modern military equipment, they would be equipped with old weapons or traditional weapons.

The Deputy Minister stressed that 50% of the activities of the defence force was done by the reserve force. The SANDF had been reformed in 1994, and the path taken was that every component of the force ought to be modernised. Funding defence could be compared to paying insurance. No one could risk having a non-insured property or business. Put differently, no one could develop an economy which he or she could not defend. The South Africa’s economy ought to be defended effectively and its security ought to be ensured. Therefore, 2% of the GDP should be spent on defence with a view to developing defence capabilities to secure and defend the economy. Spending on defence appeared to be difficult because the country remained peaceful, and some would wonder why much money could be spent on defence. The defence should be seen as insurance because an individual insured an unforeseeable event. A reasonable amount should be spent on equipping the military with skills and modern equipment. All these issues should be looked at by all stakeholders -- for example, the Committee, Treasury and the Dod -- with the same mind and from the same perspective, otherwise other countries would be laughing at South Africa. South Africa would become a country whose economic growth was praised and envied, but whose economy was not protected because it had no army. Democracy did not mean one did not have to have a capable army. Democracy and freedom had to be protected. An effective and capable army was non-negotiable.

The Chairperson remarked that the Treasury presentation had been disappointing. He asked them to present something that the country would be excited about. There was an army which was regressing to such an extent that the country would be defended by the shield and spear. The army should be funded and financially and materially enabled to meet its mandate.


Department of Defence 2018/19 Annual Report

Dr Gulube briefed the Committee on the Department’s annual report for the 2018/19 financial year. He said that the 2015 Defence Review was the second comprehensive review of that nature in democratic South Africa. It mapped out the defence direction over the next 20 to 30 years. The Review’s plan to arrest the decline was – under a prioritised intervention plan – confirmed as the point of departure for future planning. The implementation of the Review remained a work in progress and the Department would continue to pursue that within the resources allocated by National Treasury. There were three key policies that were being developed -- the Military Discipline Bill, the Hydrographic Bill and the Defence Amendment Bill.  

Dr Gulube talked about the strategic overview in terms of defence strategic deliverables. He described the manner in which the Department performed against its set targets in meeting ordered commitments, providing capabilities, ensuring sound administration and management of the Department. He commented that the defence sector participated in the Public-Private Growth Initiative of the Presidency, which aimed at attracting US$100 billion worth of domestic and foreign investment. Defence material exports had increased from R5 billion to R11 billion per annum over the last five years. A 45% global market penetration had been established.

He reported against 97 performance indicators in the 2018/19 financial year. 67 targets (or performance indicators) were achieved, representing 69% of the overall targets. 31% of targets were partially achieved. Management interventions implemented by the Accounting Officer (AO), as well as regular monitoring of progress with the implementation of improved plans, had resulted in an improved full compliance percentage, from 27% in the 2017 cycle to 33% in the 2018 cycle.

Referring to the financial performance and Defence Vote 19, Dr Gulube said that the budget allocation was deemed to be inadequate to enable the execution of the Department’s constitutional mandate. The Defence Budget Vote for the 2018/19 financial year amounted to R48.5 billion, which represented 0.96% of South Africa’s GDP and 2.9% of total government expenditure (GE). Actual expenditure had been R48.4 billion. In the previous financial year, it had been R48.9 billion.

Dr Gulube talked about the AGSA’s audit outcomes for the Department. No material findings had been raised on the usefulness and reliability of the reported performance information for three programmes, namely, force employment, landward defence and air defence. With regard to movable tangible capital assets, the Department did not disclose the work in progress related to the project assets that were under development with ARMSCOR and the defence industry environment, and did not or correctly disclose all items relating to tangible capital assets, or software licences. Furthermore, the Department did not have adequate systems to identify and disclose all irregular expenditure during the year.


Discussion
 
The Chairperson said the brief presentation could be divided into three parts: actual achievement of targets, financial performance, and the AGSA’s audit outcomes. At a previous meeting, the AGSA had briefed the Committee on the audit outcomes of the Department and its entities. The Department had had an opportunity to respond to the audit outcomes. He remarked that these three parts should, in the engagement process, be dealt with separately. He would allocate time of engagement for each part.

Mr Mmutle objected. He said that the allocation of time would work to limit Members’ engagement. The Chairperson should allow Members to pose questions generally.

The Chairperson agreed. He commented that they should deal with the two first parts and come back to the AGSA report later. He therefore sought clarity on what the reasons could be of not achieving the targets.

Mr Marais disagreed and seconded Mr Mmutle. He said three issues were highlighted by the AGSA’s audit outcomes. These issues pointed to the fact that there might be no interactions between the National Treasury and the Department, and sought clarity on how often the Department interacted with the Treasury. The 2015 Review had provided three strategic policy options, and Cabinet had selected the second option. The first option was that the budget be re-designed to allocation. The second option was an independent expansion of the defence force to achieve the defence capability commensurate with continental expectations. The third option was an expansion of the defence force through reliance on multiple strategic partners. What had informed the selection of the second option? Was there a plan action for each option?

There had been a problem with the access system, and there had not been a response from the Department on the issue. The Committee wanted to know the cost of exit mechanisms and what the cost would be for rejuvenation of the defence force. In particular, the 2015 Review had been impossible to achieve or to implement. He sought clarity on why it was impossible to achieve Operation Phakisa. He said cyber protection had been spoken about on several occasions, but there had been nothing done to achieve this. There had been 36 army units protecting the borders, which had been reduced to 15 army units. This was a serious issue, as these units could not secure the territorial boundaries of the country.

Referring to slide 41, he sought clarity on four output deliverables. Was there a budget to deploy military units on international missions, and how much would it cost the Department to deploy a military unit, for example, to Mozambique. Referring to non-financial performance information, he sought clarity on whether the aircraft and chartered craft were covered, and on how the Department planned for private jets to be used by military personnel.

Mr M Shelembe (DA) said that corruption was a main challenge facing the country, and asked about the status of litigation and disciplinary action against those employees involved in irregular expenditure. Did the Department have a list of staff responsible for irregular expenditure and for fruitless and wasteful expenditure? Had cases been reported to the police? Who was responsible for ensuring that they were held accountable? Was there case number for those people involved? How much money had been recovered?  He added that the AGSA was concerned with a tender awarded to two people. Was it awarded on the “advertised” conditions of the tender?

Mr Mmutle referred to slides indicating under expenditure, and remarked that he understood under spending to be a crime. Was there evidence to accompany the statements on these slides? It seemed that the functionality of the internal audit unit was problematic. Although the fruitless and wasteful expenditure had decreased, the amount was still huge and problematic. Some fruitless and wasteful expenditure was related to the leasing of property. Why had this issue not been discussed in time? The AGSA had stated that the Department was unable to provide it with information about movable tangible capital assets. Why? What was the role of the internal audit unit?

Department’s response

Dr Gulube said that he had a team that would assist him to respond to questions. The Department had briefed the Committee in accordance with the template provided and in accordance with legislation.

He said the Department could not apply early retirement, and agreed with Lt Gen Masondo’s response on the matter. He added that under the 2015 Review, the allocation to the defence budget could have been 2% of the GDP. Even if there was no growth in the GDP, the defence budget had to be allocated as a part of the normal government expenditure. If the economy was performing well, the Department expected a bigger defence budget, and if the economy was not performing well, there could be a standard percentage of the defence budget that could be allocated. Lesotho and Swaziland were allocating 2% of the GDP to the defence budget because they understood that their borders could be safeguarded and defended.

On the internal audit, Dr Gulube responded that the internal audit unit was a new structure. The Defence Act and related policies did not refer to an internal audit, but to an inspector general for compliance matters. The internal audit was referred to in terms of the Public Finance Management Act (PFMA) and related policies for all purposes of audit compliance matters. 200 individuals were employed under the internal audit programme, and there was a question of why they were not recruited from the inspectorate structure. Another problem faced by the Department was that there was a moratorium on the filling of vacancies. It had been difficult to capacitate the internal audit or optimising it, as required by the PFMA to meet quality assurance. The internal audit was still being capacitated and optimised.

On the issue of corruption and measures taken, he responded that it was not true that there had been no consequence management. For the last two years, matters had been reported to the military police. The military police enjoyed the same powers as the police. They could take matter to the military court for full prosecution. 184 cases had been referred to the military police. There should be a declaration of interest for employees who were doing business with the government. It was in 2015 that it was legally not accepted that employees could do business with the government. Some employees – with companies – had resigned in order to run their companies and conduct business with the state.  There was an investigation process about employees who were conducting business with the state.

Dr Gulube said that he had alluded to the fruitless and wasteful expenditure over the past five years in his brief presentation. There had been an engagement with the Department of Public Works to find out who the employees were who were involved in the leasing of premises. Investigations had been conducted and cases had been referred to court. There were police case numbers which could be submitted to the Committee.

On the movable tangible capital assets, he said there were immovable and movable tangible capital assets. The Department had not disclosed the financial statements to the AGSA because the work was still in progress. The assets included the number of vehicles, arms, etc. The Department had spent R3 billion on movable assets and the AGSA was interested in how this money had been spent. There was a standard auditing process that the Department had to comply with. The Department had submitted its books on how the money was spent to the AGSA.

The Chairperson said that the internal audit unit should be established and fully capacitated, because this was required by law. The internal audit unit was capable of detecting early signals of poor financial performance. He was happy that the issue of the building had been resolved and that there would be no more fruitless expenditure. More than R90 million had been paid on this building. The Department should continue to follow up with the recurring matters to find how they could be addressed. The AGSA had said that it was aware of sensitive and non-sensitive matters. Sensitive matters could not be audited. The irregular expenditure matter was not closed, according to the AGSA. There would be a follow up by the Standing Committee on Public Accounts (SCOPA) on the financial performance of the Department.

The Deputy Minister said he noted that the concerns of the Committee were the same concerns shared by the Minister. He agreed that the internal audit unit should be capacitated in order to meet the PFMA requirements. Consequence management was very important and would be pursued and implemented. There should be a process of investigating fraud and corruption. Accountability should be taken seriously.

The meeting was adjourned.