Defence Portfolio Audit Outcomes; DMV & CCB 2020/21 Annual Report; with Minister

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Defence and Military Veterans

10 November 2021
Chairperson: Mr C Xaba (ANC)
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Meeting Summary

Annual Reports 2020/21

The Portfolio Committee was briefed in a virtual meeting by the Auditor-General of South Africa (AGSA) on the audit outcomes of the Department of Defence (DOD) portfolio, and considered the 2020/21 annual reports of two of its entities -- the Department of Military Veterans (SMV) and the Castle Control Board (CCB).

The CCB achieved a clean audit outcome and achieved 80% of targets for the financial year under review. The DMV reported that of the 15 targeted performance areas, 6 targets were achieved which resulted/ constituted to 40% in overall achievement. The DMV achieved an unqualified audit opinion for the financial year.

Members raised concerns over the irregular spending within the DOD and the lack of consequence management measures. AGSA reported that during the audit, it had identified instances of irregular expenditure due to non-compliance with procurement legislation, and had requested management to revisit the entire population and adjust the disclosure of irregular expenditure, but it had not done so. As a result, AGSA could not confirm the completeness of irregular expenditure disclosed in the notes to the financial statements. Members were concerned about the fact that some of the audit recommendations were not being followed, because it affected their role of oversight over the Department.

The DMV said its limited capacity hindered its administration and the disbursement of benefits to the veterans. The absence of an information communication technology (ICT) support system during the year continued to compromise the integration and management of information, resulting in having to rely on a manual system which was labour intensive and had lots of risks in terms of tightening controls, monitoring, etc. It was committed to improving the veterans' circumstances, many of whom were unemployed and living in inadequate housing.

The Castle Control Board pointed out that the Covid-19 pandemic had compelled it to close the Castle in March last year, which had deprived it of tourist revenue. However, with relief funding from the Department, it had been able to retain staff and reopen in September, although visitor numbers for the year were down by 309%. It was looking at having an electronic brochure for marketing the castle and also making it more accessible to more people via online services, but this was heavily dependent on the funding.

Meeting report

AGSA: Defence portfolio audit outcomes

Ms Mbali Tsotetsi, Deputy Director, Auditor-General of South Africa (AGSA), said the overall outcomes in the Department of Defence and Military Veterans (DoDMV) portfolio remained similar to the prior year. The Castle Control Board (CCB) audit outcome had improved to unqualified with no findings -- a clean audit -- while Armscor had regressed from unqualified with no findings to unqualified with findings. This was due to non-compliance as a result of material adjustments made to the submitted financial statements.

The audit outcome for the DOD remained qualified, similar to the prior year. However, two new qualification areas were identified in the current year that related to movable tangible assets that could not be verified for existence, and overstatement of leave entitlements. The audit outcome for the DMV remained the same as in the prior year. Material findings were reported on performance reporting and compliance with legislation.

Two auditees, the DOD and Armscor, submitted financial statements that contained material misstatements. Armscor subsequently corrected the misstatements, thus achieving an unqualified opinion. Management did not prepare regular, accurate and complete financial and performance reports that were always supported and evidenced by reliable information. This was mainly due to a lack of proper record management systems and insufficient controls over daily and monthly processing and reconciling transactions. There were inadequate reviews of the financial statements, lack of adequate preventative controls for processing and reconciling financial records, as well as defragmented financial systems and system limitations.

In terms of the goods and services and investments, the Department accounts for non-sensitive and sensitive projects expenditure in connection with special defence activities. During the audit, AGSA could not obtain appropriate supporting audit evidence on sensitive projects expenditure and related investments due to the sensitivity of the environment and the circumstances under which the related transactions were incurred and recorded. This resulted in a material limitation of scope.

During the audit, AGSA identified instances of irregular expenditure due to non-compliance with procurement legislation. Management was asked to revisit the entire population and adjust the disclosure of irregular expenditure. However, the Department did not revisit the population and effect the required adjustments, with the result that AGSA could not confirm the completeness of irregular expenditure disclosed in the notes to the financial statements. In addition, the accounting officer did not disclose some cases of irregular expenditure identified by the auditors. This resulted in a recurring qualification on irregular expenditure disclosed in the financial statements, as the same finding was reported in the last two financial years.

During the audit, AGSA was unable to verify some of the movable tangible capital assets that were disclosed in the financial statements. Management could not indicate where these assets were located, nor could they provide other information in support of these assets. This resulted in the qualification on the existence of movable tangible capital assets disclosed in the financial statements.

The Department did not establish adequate internal controls to monitor leave processing. As a result, not all leave taken by officials was captured on the system during the year. This resulted in the leave balance and the related provision being overstated in the disclosure to the financial statements.

Material misstatements were identified in the annual performance report submitted for auditing by the CCB. As these material misstatements were subsequently corrected, no material findings on the usefulness and reliability of the reported performance information were reported.

In the current year, the outcomes on compliance with legislation remain unchanged from the prior year.  Two auditees, the DOD and DMV, did not implement effective action plans to address significant internal control deficiencies relating to compliance with legislation. Armscor submitted financial statements that contained material errors, and this resulted in non-compliance with legislation.

The Committee heard that on the issues of compliance with legislation, sufficient and appropriate audit evidence could not be obtained and that disciplinary steps were taken against officials who had incurred irregular, fruitless and wasteful expenditure, as required by section 38(1)(h)(iii) of the Public Finance Management Act (PFMA). This was because investigations were not conducted into some instances of irregular, fruitless and wasteful expenditure incurred in prior years.

At the DOD, the AGSA also noted that in some instances where investigations were conducted and finalised, the Department failed to take disciplinary steps and/or recover losses where required. This included matters that had been reported as material irregularities. The recommendations were that there must be timely investigations of reported irregular fruitless and wasteful expenditure. Accounting officers/authorities must ensure that timely disciplinary actions are taken against officials that transgressed procurement regulations or incurred fruitless and wasteful expenditure. Accounting officers/authorities must enhance action plans to address repeat findings, and leadership must exercise oversight and take decisive action regarding consequence management.

Other investigations included the Special Investigating Unit (SIU) conducting an investigation covering the 2018/19 period into allegations of procurement irregularities on information communication technology (ICT) services and licences. The investigation was being conducted in terms of Proclamation No. R41 of 2019, dated 25 June 2019. AGSA had not yet received this report at the date of this briefing. The SIU also conducted investigations into Covid-19 personal protective equipment (PPE) procurement by state institutions. The investigation was being conducted in terms of Proclamation No. R23 of 2020. AGSA had not yet received this report at the date of this briefing. The Department conducted a forensic audit on the refurbishment of One Military Hospital and on the contract with a service provider for the asset management contract. AGSA had not yet received these two reports at the date of this briefing.

The Department did not obtain approval from the South African Health Products Regulatory Authority (SAHPRA), as required by the Medical Council of South Africa (MCSA) regulation 6.2, before importing the unregistered drug Heberon Alfa R (Heberon) into the country. The Department procured 970 895 vials of Heberon from a Cuban supplier between 27 April 2020 and 17 August 2020. SAHPRA re-authorised the use of only 10 vials of Heberon on a single patient on 5 October 2020. SAHPRA had granted no further approvals. The Department currently had approximately 970 885 vials that were not approved for patients. The outstanding approval, together with the approaching expiry dates of March and April 2022, would most likely result in the Department not administering some or all of the remaining drugs. Therefore, the non-compliance had resulted in a likely material financial loss of R260.3 million to the Department.

The Department did not comply with the requirements of the Preferential Procurement Policy Framework Act in awarding the inventory and asset management contract. The non-compliance was likely to result in a material financial loss as the contract was awarded to two bidders at a higher price for the same scope of work. During the 2019-20 audit, AGSA issued recommendations to the Accounting Officer (AO) to investigate the irregular expenditure, quantify the financial loss suffered, take appropriate and effective actions against officials identified to be responsible and determine whether the responsible official was liable by law for the losses suffered by the Department for the purpose of recovery. Based on the assessment of the AO’s written response and supporting evidence on the implementation of the recommendations, AGSA concluded that the recommendations had not been adequately implemented. The AO cited limitations with the Defence Act, which does not give powers to the AO to take disciplinary action against the military command members as the reason for lack of implementation. This limitation, however, does not impact civilian officials and the quantification of the financial loss.

In 2019, the Department awarded a contract worth R13.9 million for the supply and delivery of fuel to a supplier using evaluation criteria that differed from those stipulated in the original request for quotations. The awarding of the contract using different criteria resulted in non-compliance with treasury regulation 16A.3.2(a), which requires that the supply chain management process be fair, transparent, competitive and cost-effective. The non-compliance caused a material financial loss of R2.57 million due to a higher price being paid for the fuel. The AGSA identified gaps in the manner in which conclusions were reached without supporting evidence and a lack of consideration for the transparency and fairness of the process followed. The AGSA recommended that the Portfolio Committee should monitor the implementation of consequence management in the portfolio, including steps taken to address material irregularities reported.

The recommendations from the AGSA were that the entities within the defence portfolio must ensure adequate and effective implementation of preventative controls, and develop and implement effective action plans timely to address audit findings and key deficiencies. The accounting officer/authority, with the support of the audit Committee, should monitor the implementation of action plans, conduct proper and timely investigations into all instances of irregular fruitless and wasteful expenditure and material irregularities to determine whether any official was liable for the expenditure, and institute disciplinary action.

Discussion

Mr S Marais (DA) acknowledged the report from the AGSA, but said he was concerned about the fact they referred to their work as monitoring, and it came across that they did not have enough powers to hold the entities accountable. He wanted to know if the Committee could take any substantive measures to assist the AGSA in getting more information. He was concerned about the allegations against the accounting officer, and suggested that the Committee should have a meeting with her since she was absent from the meeting. He also asked about the special defence account, and wanted to know about the expenses that were taking place and if the PFMA was applicable in this instance. He was concerned about the lack of clarity on the special defence account, because it was not clear on who was in charge. He asked if there were other subdivisions within the Department where the AGSA had also picked up problems. Another concern he raised was the fact that the Department was not in a position to do foreign transactions, and there must be an explanation as to why they were having forex losses. Lastly, he asked about the fund that was mentioned by the AGSA, and wanted to know the specifics of the fund.

Ms A Beukes (ANC) said the presentation painted a gloomy picture of the current situation. She wanted to know the current status of monitoring action plans and if these were effective. She raised the issue of non-compliance, and said that consequence management must be implemented. She wanted to know what challenges the Department was facing when it came to implementing their targets, and if they could provide reasons to the Committee.

Mr T Mmutle (ANC) asked about asset management within the Department. He questioned whether there was a deliberate action by the Department to ignore legislation and supply chain management, because they had not been effective in effecting consequence management. He also touched on the irregularities of contracts and wanted to know if there was anything that the Department could have done to avoid such situations. He was of the view that it appeared as if the Department was deliberately undermining the legislation.

The Chairperson thanked Members for their questions, and suggested that some of the questions that had been directed to the Department be sent to the Department so that they could provide a detailed response when they had a meeting with the Committee in the following week.

AGSA's response

Ms Tsotetsi said that the AGSA, together with the mandate of the Committee, dealt with the recommendations to the executive and the Committee must use their mandate to address matters because they had the powers to do so, and their powers were not limited when it came to accountability and oversight. The AGSA did not limit the Committee in any way, especially when it came to consequence management matters.

She said that the special defence account was subject to the PFMA, and the oversight was done by the Joint Committee on Intelligence, and the AGSA reports to this Committee on their findings.

It would not be possible to classify the funding into sub-divisions. More information on the foreign transactions was detailed in the fruitless expenditure column. The Department had paid money from their budget, which was why it was reflected in their books. The fund was audited by the AGSA and a report had been made on this.

Commenting on the issue of irregular expenditure, she said that the AGSA had highlighted the root causes and some of the things that resulted in irregular expenditure and the awarding of contracts. There had been a benchmarking exercise done a few years back, and they had realised that the standards being used were not the same when it came to the different entities, and these differences contributed to how financial statements were compiled. The AGSA had met with the intelligence services to discuss their findings and to make sure that all the role players were on board and gave their assurance.

She told the Committee that the issue of asset management and consequence management could be linked back to the internal controls that were not being followed, and that the monitoring and oversight was not effective, which resulted in the non-compliance with legislation. The AGSA had advised the Department to deal with the irregularities and impose consequence management.

The Chairperson thanked Ms Tsotetsi for her engagement with the Committee, and asked the Minister to give her comments on the presentation.

Minister's comments

Ms Thandi Modise, Minister of Defence, thanked the Committee for inviting her to the meeting and being part of the discussions. The Department supported the Public Audit Amendment Act as it strengthened the responsibility and accountability within departments. The AGSA did not limit the role of Parliament, and oversight allowed for the scrutiny and checking that public funds were properly managed and spent within the stipulated laws. If there was any deviation from the budget, then there must be transparency and discussions that would highlight what the current state of affairs was. She would make sure that the Committee was not undermined.

The matter of hesitancy to take measures against some staff members was being dealt with, because there were procedures that must be taken before a decision was handed down, and everyone in the Defence Force respected the Constitution.

She said that the systems of accounting in the Department were out of date and there was work to be done because the systems were supposed to be top of the range ,and they were working on achieving this so that there was efficiency in the Department.

Department of Military Veterans (DMV) 2020/21 Annual Report

Ms Irene Mpolweni, Director-General, DMV, said that the Departmental structure was not aligned to the administration and disbursement of the benefits. There was limited capacity, and she requested intervention to fast track the finalisation of the structure so that it could be approved and implemented. The absence of an ICT support system during the year continued to compromise the integration and management of information, resulting in having to rely on a manual system which was labour intensive and had lots of risks in terms of tightening controls, monitoring, etc. Having a manual filing system was a risk area, with the loss of documents, misfiling, and information on the data files not being aligned to information on the files. The lack of an integrated ICT support system compromised the security of information as far as the personal information of applicants and beneficiaries was concerned.

The DMV had planned to achieve 18 performance targets areas during the 2020/21 financial year. Due to the Covid-19 pandemic, it had to re-table the annual performance plan (APP) for the 2020/21 financial year to incorporate Covid-19 interventions and to align with the special budget adjustment. The DMV had revised its targeted planned numbers down from 18 to 15, so three targets were discontinued. Of the 15 targeted performance areas, six targets were achieved, which constituted a 40% overall achievement.

The Department targeted four performance indicators to achieve efficient and effective administration capabilities, and three were achieved.

It targeted six performance indicators to deliver the socio-economic benefits to military veterans and their dependents, and two were achieved.

It targeted five performance indicators to assist military veterans to benefit from skills development programmes and business opportunities, and one was achieved.

The key strategic outcome-oriented goals that the Department was mandated to advance for the 2020/21 financial year were to provide efficient, effective and excellent administrative support, an improved and sustainable socio-economic status of military veterans (MVs), and empowered and self–sufficient military veterans.

The number of MVs who were verified and captured on the national Military Veterans Database was reported as being 2 489 against a target of 5 325 in the annual performance report. However, the supporting evidence provided was materially different from the reported achievement. There was insufficient appropriate audit evidence to confirm the number of MVs approved and provided with compensation benefits. The performance report indicated that 2 779 bursaries were provided to MVs and their dependents against a target of 3 500, but some supporting evidence provided materially differed from the reported achievement, while in other instances there was insufficient appropriate audit evidence. Another factor was applicants who were reported in the incorrect financial year.

The DMV achieved an unqualified audit opinion for the financial year.

(See attached presentation document for details).

Castle Control Board (CBB) Annual Report 2020/21

Mr Calvyn Gilfellan, Chief Executive Officer (CEO), Castle Control Board, presented the Board's performance report for 2020/21, focusing on programmes and areas that required additional funding, and the impact of reprioritisation on the operations and management in the light of the COVID-19 pandemic, during which it received R4.9 million in relief funding from the DOD.

The CCB's performance for the 2021/21 financial year was marked by a clean AGSA audit outcome, and judicious programme spending of the R4.9 million relief funding. Despite little tourism business during the lockdown period, it had self-generated R777 000 in revenue. It had achieved more than 80% of its 21 key performance indicators (KPIs), despite a massive drop in visitor numbers to the Castle. The deployment of six regional works unit artisans had significantly enhanced maintenance. Media coverage had reached a global audience of 554.6 million people, and the Castle had sustained 26 full-time and 800 temporary jobs.

Since the CCB was a services/hospitality organisation, it relies heavily on people to execute its mandate, which means a high staff to operations ratio. Although it has only 16 full-time posts, interns and short-term contracts pushed this number up to 44. These figures exclude South African National Defence Force (SANDF) members and other entities on site.

Save for senior management, the employment equity status was positive, given the CCB's size. Although the Castle was off-site for months, it maintained contact with its client base and ensured that it remained in good condition.

Because of the Covid-19 measures, the Castle closed on 19 March 2020, causing lots of unease amongst staff. When it received the R4.9 million in relief funding from the DOD and continued delivering its mandate, the CCB team gelled together. The Castle reopened on 1 September 2020 with a trickle of visitors and despite heavily scaled-down activities, it had a few good filming events. Visitor numbers -- and business -- declined by 309%.

Mr Gilfellan concluded by saying that the Board wanted to build and maintain good relations with the Portfolio Committee, and its focus was on resilience, economic recovery, and the building of a brighter future for all.

Discussion

Mr M Shelembe (DA) raised a concern about the communication between the Department and the military veterans. He said that when military veterans ask about their benefits they were not being treated in a good manner, and in most instances their concerns were not responded to. Military veterans should be assisted, and it was disturbing how the Department was not working on solving this issue, because during the lockdown most military veterans were living under difficult circumstances. He requested that the Minister address the matter with the Committee.

Mr Marais also referred to the frustrations on the matter of communication from the Department. He was aware of the budget cuts, but wanted to be briefed on the performance of the Department because they had not mentioned how the budget cuts had affected them. The Department had a legislative obligation to take care of military veterans, and this must be done. He referred to a case in which one veteran in Cape Town had made enquiries for assistance for his Down's Syndrome son, and was not treated in a good manner. He was concerned about health services not being available to military veterans, especially in Cape Town, where they had to travel far for assistance. Another concern was the housing matter -- most of the military veterans were in need of decent housing, as most of them were in houses that had asbestos roofing. This was not good for their health, and the Department should look into solving these problems.

Mr Mmutle was concerned about the dire situation of military veterans around the country, and their involvement in the St George's Hotel hostage drama was very concerning. He said there seemed to be a trend that every time there was a failure to achieve targets, the military veterans’ services were reduced. There was no point in reducing these services, because the MVs were in need of them. He was also concerned why there was under-spending by the Department, because they were supposed to be spending within their constituencies and it appeared that they were not doing justice to their responsibilities. He also requested that the Minister look into matter and try to find a solution to assist military veterans.

Ms Beukes said that the CCB had been working well. She wanted to know if there was any plan to have online educational programmes from the Castle to help citizens understand its history. She also asked the Committee to look into how they could help the Castle to come up with a brochure for marketing purposes.

The Chairperson was pleased how the Castle board had been working, especially considering the current Covid-19 pandemic. He was concerned about how other countries have been able to open up most of their activities, but South Africa had not yet reached the vaccine targets. He appealed for everyone to assist government in achieving these targets so that the country could be opened up and start to drive the economy again in a positive way.

DMV and CCB's responses

Ms Mploweni welcomed the comments raised by Members on the matter of communication, and said that there had been progress on addressing this matter with the assistance of the State Information Technology Agency (SITA), and they hoped to be more efficient. The provincial coordinators would be able to get feedback and accurate information efficiently, which would enable them to assist the military veterans and make sure that they were treated with dignity. Ms Mpolweni also guaranteed that the issue of the Cape Town military veteran raised by Mr Marais would be investigated and disciplinary measures would be taken.

She told the Committee that the budget cuts have had a negative impact on the DMV because some of the money was used for Covid-19, and the Department would work with the Treasury to try and ensure there would be no budget cuts in the future so that it could achieve its targets.

She asked that the Committee give them an opportunity to investigate the asbestos issues and revert back to the Committee. She gave an assurance that the DMV was committed to achieving service delivery for military veterans, and were working on programmes that sought to improve their living conditions, as they were aware of the high number who were unemployed.

Mr Gilfellan thanked the Committee for their feedback, and said that they were looking into an electronic brochure. However, this was still in the early stages, and they would provide more information to the Committee in future. The availability of funding would determine how the online programmes could be conducted, as it required money to stream such services.

The Chairperson asked the Minister to give the closing remarks.

Minister's closing remarks

The Minister thanked the Committee for engaging with the Department, as this allowed for the sharing of ideas. She said that the Department hoped to increase the utilisation of the Castle so that they could re-establish the Mandela Project. She also praised the Castle board for the good job that they had been doing, considering the current situation.

The Minister highlighted the importance of taking care of the military veterans. The Department was working on resolving the military veterans' issues, but it was important to look at the reasons why the DMV had been established -- once this was done, it could help in resolving some of the problems that were being faced today. It was important to have a defined group of beneficiaries as military veterans. She said that the Ministry was willing to work with the DMV, and they hoped to come back to the Committee with detailed reports and financials that would show a better picture of the situation.

Meeting was adjourned.

 

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