Project Thusano: DoD response to AGSA findings; DoD Audit Committee and Internal Audit Division on challenges and monitoring of Internal Audit Action Plan; with Deputy Minister

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Defence and Military Veterans

08 June 2022
Chairperson: Mr V Xaba (ANC)
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Meeting Summary

AGSA: Findings on Project Thusano

The Committee met on a virtual meeting platform for a briefing relating to Project Thusano -- a Department of Defence (DOD) initiative with the Cuban armed forces that involved the maintenance and repair of the South African National Defence Force (SANDF) operational vehicle fleet. The DOD entered into a bilateral agreement with the government of Cuba for defence cooperation based on developmental needs and sharing of expertise. This was motivated by the fact that Cuba had a unique maintenance and preservation system of old prime mission equipment dating back to 1954. This agreement led to Project Thusano. Over the years, the two governments had entered into supplementary agreements to effect the overall bilateral agreement. The DOD had procured these services through two main contracts in the bilateral agreements and various supplementary agreements.

Members raised their concerns with the Thusano project because it had previously been indicated that the project would last only five years, but now it had been extended to January 2025. Why had it been extended? The presentation showed that the procurement of medicine during the Covid pandemic was under contract 002, but a written letter from the Chief of Logistics on 14 February 2021 stated that it was under contract 001. This was a contradiction and should be clarified.

The Committee agreed that it was not happy with any of the presentations. A meeting would be held with the Minister, the Deputy Minister, the Chief of Logistics and the Secretary for Defence to address the issues  raised.

Meeting report

Mr Thabang Makwetla, Deputy Minister of Defence and Military Veterans, informed the Committee about what would be presented today. Ms Gladys Sonto Kudjoe, Secretary for Defence (SecDef), indicated who would be making the presentations.

She also said that the audit committee had six members but now had only three. One of the members had sadly passed away, and the terms of the other two had ended, and the vacancies had been advertised.

She said there was a short and longer version of the Thusano project and asked which one should be presented to the Committee.

The Chairperson said the longer version.

Project Thusano Comprehensive Report

Brig Gen Benny Mtsweni took the Committee through the report, which covered the background, contracts, skills transfer, vehicles repaired, components repaired, vehicles in preservation, simulator project, capability building, expenditure, comparison between industry and Project THUSANO, projected expenditure for the remainder of the contract, deployment of Cuban specialists, contractual options in South Africa, achievements, requests for information (RFI) from the Auditor-General of South Africa (AGSA), and the conclusion.

The longer version did not have some of the findings in the shorter version of the presentation. The Chairperson asked the Logistics Division (C Log) to address them.

Brig Gen Mtsweni addressed the responses to the AGSA findings. The procurement policy was not followed and therefore deemed irregular, according to the Public Finance Management Act (PFMA). National Treasury supply chain management (SCM) Instruction note 3 of 2016/17 (preventing and combating abuse in the SCM system), para 8.1, states that the accounting officer must deviate from inviting competitive bids only in cases of emergency and sole supplier status. In this case, the Department of Defence (DOD) had been in a state of disaster.

The Chairperson asked what he meant by "state of disaster."

Brig Gen Mtsweni said it was because of the COVID-19 pandemic.

The Chairperson said this was from 2017, and the pandemic had started only in 2020. He wanted to know which procurement was involved. The Committee was confused, and he wanted C Log and the Committee on the same page.

The Chairperson asked if they were referring to supplementary contracts they had deviated from.

Mr T Mmutle (ANC) asked if the contract was only for this financial term or overall.

An official of C Log said two issues were involved. The one element was the state of emergency that started in 2019, which they acted on in 2020. The contract talked about the South African National Defence Force (SANDF) and Cuba, which had nothing to do with emergencies. The first part of the paragraph that talked about the SCM of the first contract, took place in the 2015/16 financial year.

The Chairperson said that the first part of the paragraph addressed the original contract but also dealt with issues of 2020/21. The Auditor-General (AG) had said that the Department had not followed any procurement processes, nor had they obtained any division prior to entering into various supplementary agreements with the Cuban entity, so the expenditure incurred under Operation Thusano was deemed to be irregular and should be disclosed as such. The paragraph provided sought to address this finding, but at the same time, it referred to issues that occurred later on. So what were they saying?

C Log explained that at the beginning of the Thusano project, the DOD wanted goods and services from Cuba, which was done under a bilateral agreement. Such agreements had been done before, where there were lots of engagements with other countries. Currently, there are two students in China for logistics training. All the services provided to the South Africa National Defence Force (SANDF) and the DOD were provided through partners, and they had managed to grow bilateral agreements with China. There was previously a bilateral agreement with the United Kingdom.

With the technical issues faced by the DOD in general, it was established that the Cubans knew how to deal effectively with situations like this, so assistance was requested. This was how the Thusano project had started. The SANDF did not see it necessary to go through the procurement process because they had done this before when they wanted people for their skills. All this was related to outsourcing, which was explained in slide 48 of the presentation in not so much detail.

There was an injustice if the people the SANDF trained were not utilised. There were qualified technical officers, but they were not used in workshops, which in itself was irregular. This was what happened between 2015 and 2019. The other part dealt with 2020/22 during the pandemic and was not part of the Thusano project.

The Chairperson said that the first paragraph must be split because it dealt with two matters -- the contract between 2015/19 and the contract between 2020/22. In other words, the state of disaster referred to those contracts in 2020/22. They should have made this clear in the beginning to avoid confusion.

The Logistic Division had responded to all requests for information (RFIs) from AGSA. This was confirmed in the correspondence from Mr Delmar le Roux to Mr Edem Abotsi, Chief Director: Compliance, DOD, dated 1 June 2022. Outstanding information from the Arms of Services was being attended to, and would be forwarded to AGSA as soon as possible.

The Chairperson said it had been requested that information be re-issued in the current year, and further engagements had been held with the responsible unit managers, but to date, some of the key information had not yet been provided. Was there any reaction to this?

An official said that the information had been provided, and Mr Le Roux had even written back that he had received all the information.

Deputy Minister Makwetla said the first point was that all the information that AGSA had requested had been submitted. The second point was that there was outstanding information from the Arms of Services and that it would be submitted to AGSA.

He asked the Chief of Logistics to explain how they handled the Thusano project administratively. He was under the impression that everything relating to the project so far was through the Chief of Logistics -- that whatever the Arms of Services were doing within the contract was through the Chief of Logistics. All the Arms of Services were functioning through the structures of the Chief of Logistics, so saying now that information would be provided to AGSA by the Arms of Services and not C Log created confusion. The Chief of Logistics did not provide the information requested, and now the Chief of Services must account to Parliament.

The Chairperson asked for clarity. AGSA had said that not all the requested information had been received. Today they were saying that some parts of the information received were in their domain. The outstanding information must come from the Chief of Arms of Services. Had the information been forwarded to the AGSA offices?

An official said that they had looked at the Republic of South Africa's capacity and assessed it before deciding to enter into a contract with the Cuban government -- for instance, how the transport technique was determined. The logistics division was the starting point for the Thusano project regarding the contract and accounting. The report referred to any information that sought to clarify how requirements were determined, which found expression in the contract they were talking about. This was the information that AGSA was talking about, supposed to be coming from the Arms of Services.

The Chairperson interrupted and said he did not want details. He just wanted to know if the requested information had been submitted.

An official said that the information had not been submitted.

Mr Lourens van Vuuren, Business Executive, AGSA, said that it was important to note that there was still information outstanding from C Log -- for example, supplements to the contract which were directly under the control of the logistics division. AGSA could provide the Committee with further details after the meeting. They had wanted to visit one of the workshops on 28 April 2022. After arrangements had been made, AGSA was informed that they were not allowed access, contrary to the Public Order Act stipulations.

SecDef Kudjoe said she would engage with the offices about the outstanding information. The issue of AGSA wanting access to a workshop to do a value-for-money analysis would be resolved.

Deputy Minister Makwetla said that the SecDef would deal comprehensively with the findings of AGSA. There was a need to comprehensively respond to issues raised by the Auditor-General and information requested. He understood that the outstanding information was from the Arms of Services, but it was information that was supposed to have been submitted by the Chief of Logistics. Was the Chief of Logistics waiting for the information from the Arms of Services so that his office could submit it? If this was the case, what they were saying in the presentation was misleading. The Chief of Logistics must provide outstanding information, and the SecDef must intervene and address these issues.

Mr S Marais (DA) asked if the information provided of R1.3 billion for Thusano was for 2020 and when was the Chief of Logistics appointed?

The Chief of Logistics said that the R1.3 billion expenditure reported covered the six years from 2015 to 2021. The head of logistics had assumed duty in the middle of 2017.

Mr Marais recalled that in 2016 it had been said that the Thusano project would last only five years. It had now been established that this was not the case and it would end in January 2025. Was the original agreement for only five years, or was it extended? If so, what was the term of office and why was it extended? Previously there had been a decision that auctions on all vehicles and equipment should stop, which was a leading contributor to the establishment of the Thusano project. To what extent had the revenue normally generated from auctions been offset against all costs incurred? The presentation showed that the procurement of medicine was under contract 002, but a written letter from the Chief of Logistics on 14 February 2021 clarified that it was under contract 001. This was a contradiction and should be clarified. How had they justified putting it under repairs or vocational training?

The AGSA had previously said that the accounting officer should take effective and appropriate steps against officials who allowed irregular expenditure, as required by the PFMA and National Treasury regulations. Had the SecDef, as the accounting officer, instituted any action against anyone for disciplinary hearings, considerations, or criminal investigations? There was an obligation on her, and if she had not done this, she was transgressing certain laws, which would make her liable for prosecution.

He asked for clarity on the date of the information because in a written question he had sent to the Minister, she had responded with details on things such as aircraft charters. The chartered aircraft costs given in this meeting were under R220 million. The Minister had said up until the middle of last year that South African Airways was only around R136 million, so there was a difference. The comparison between the industry and Thusano for 2021 was said to be R239 381 302. It was also said that the projected expenditure was R277 624 611. Was this an additional R277 624 611, or was it the same as the R239 381 302? If it was the same thing, why was it different? How were the industry and Thusano compared? Was it in terms of reference and things like that? This could be provided to the Committee in writing.

He asked for clarity on the state of emergency/disaster. He recalled that previously there had been a mention of a state of emergency and the threat of biological warfare. The Minister had said that the notion that it was engaged in biological warfare had never been discussed, not even at the National Command Council.

The Chairperson clarified that it was a state of disaster and not an emergency.

Mr Marais asked who had declared the state of disaster. The state of disaster that was declared in South Africa was related to COVID-19 and did not exclude the DOD from acting in their own way. If there was a state of war, they could do what they wanted, but not when there was a state of disaster. So, who had declared and confirmed that they were allowed to do what they wanted when South Africa was in a state of disaster? The Minister had said that this was not the case. An explanation had to be provided.

The servicing of contracts had amounted to R966 071 329 -- why was it so much? There were only 140 Cubans, and this amount of money was enormous.

Mr Mmutle disclaimed that how this meeting was proceeding, with the issues that were defence related, seemed to suggest that things were now done incoherently. It had been stated that there were no irregularities without following the procurement process concerning the Thusano contract. The understanding of the SANDF was not the same as AGSA's. If students were being sent to China and other countries, they needed to acquire a certain skill and utilise it in South Africa, but this was different from the services under the Thusano project.

He asked if the Auditor-General could explain the procurement processes. What should the Defence Force have done if they wanted a specific service but did not want to follow the procurement process? Should they have motivated the decision and approached National Treasury? He just wanted to know what should have been done. There was a difference between sending students elsewhere and using those skills in service; these should be treated differently. What informed them to treat certain contracts as the best? What had the audit outcomes of the contracts been?

Mr Van Vuuren said if a department or public entity could not fulfil a procurement process, they needed to approach National Treasury and motivate a deviation. National Treasury could then grant it or not, based on the facts. Without the relevant deviation approved, it would transgress the laws.

Mr Mmutle asked why the logistics division had not followed these processes.

A DOD officer said there had been an extension of both the contracts that started in 2015. The initial thought was to develop skills to address the issue of outsourcing, which was supposed to be five years. The five years had passed and there were still some students in Cuba, especially for technical and engineering skills. It took about six years -- five years for training and an additional year to learn the language.

The Chairperson interrupted and said that the officer did not have to explain further because this was all they wanted to know regarding the extension of contracts.

Regarding the auctioning of vehicles, it had been discovered that a number of vehicles had to be fixed. For example, it was requested that the vehicles be sent to Mozambique, and after six months, there was a request to fix them. On average, about R300 000 was spent to fix just one vehicle.

The contracts of 001 and 002 have been corrected. When the military faced a military problem, there was a military appreciation process that informed them on how to respond. In this case, the military was faced with a situation that was a military problem because there was no clinical research or outcome of some research given to them to inform them about what they were dealing with. The pandemic involved the organs of human beings. Taking this into context, it took the military to a biological type of thinking. It was never said that they were dealing with biological warfare. At that time, it was lockdown level five, and then they were dealing with a state of emergency because no one was outside -- it was only the military on the streets. The military only responded in that fashion based on their military appreciation process.

The Committee was confused because it had been corrected that it was a state of disaster and not an emergency.

The official corrected his mistake and said it was a state of disaster.

The servicing of a contract entailed two contracts -- for skills development and goods and services. The amount included all of that, including labour costs, welfare support for the Cubans in South Africa and medical cover. The Defence Force was indeed crying out for a different dispensation. It was discharging some of the institution's duties, especially in a state of disaster. A new dispensation needed to be devised. The DOD was not the only Department dealing with Cuba. The Department of Health had similar services to Cuba. The students in China and Russia were not different from what the Department of Health was doing. The DOD did not think that it would be treated differently.

Mr Mmutle was concerned about the number of institutions supporting students to study at various institutions domestically and internationally. This was treated differently. The support to acquire knowledge was the same as the services from Cuba, just in the form of a project. Cuba was servicing the vehicles. This was not the same and should be treated as such. The people from Cuba were not here to learn but to perform services.

An official said the people from Cuba were not in South Africa to service the vehicles and were here to transfer skills to SANDF members, which was a joint effort. It was hard skills being transferred with no theory work.

Mr Van Vuuren said there were cases where it was necessary to go for training in a specific country. So there would be cases where it would be justified to go to a specific place for training unavailable in South Africa.

The Chairperson said that the issue of not all the requested information being submitted must be dealt with. This issue was first reported on 16 March 2022. On 23 March 2022, AGSA wrote to the Minister that they were still experiencing difficulties obtaining all the requested information despite the escalations to the Chief of Logistics and the SecDef. As an accounting officer, SecDef should ensure that the outstanding information was shared with AGSA. This included the site visit by AGSA to the training workshops. A week was given to address these issues and report to the Committee.

The SecDef said they knew the AGSA report was still in progress. After this report, AGSA would be able to inform them whether there was formatting or no value for money. The DOD would then institute their own activities within the organisation to ensure that the challenges identified were dealt with.

Briefing by Internal Audit Division

Ms Fikile Mabilane, Acting Chief Audit Executive, DOD, described the role and responsibilities of the internal audit division to the Committee.

The division developed its annual audit plan utilising the Departmental risk register. This was done to ensure compliance with the Institute of Internal Auditors (IIA), which states that the internal audit function should follow a risk-based approach. The division provides assurance and consulting services to management and the audit committee per the guidelines provided in the Standards for the Professional Practice of Internal Auditing (SPPIA), as issued by the IIA.

Key internal audit findings for FY2021/22

  • Goods or services with a transaction value of R10 000 to R500 000 had been procured without the minimum three written price quotations, without approval to deviate;
  • A bid was awarded and paid to suppliers whose tax matters were not in order;
  • No declaration of interest by employees and suppliers was attached to a file;
  • Central Supplier Database (CSD) reports were out of date or not attached;
  • System access on e-procure was granted without defined and approved roles and responsibilities;
  • Changes to e-procure users were not updated on the database;
  • No vetting was conducted for the Military Skills Development System (MSDS) by Defence Intelligence for MSDS appointments;
  • Some of the MSDS candidates were selected even though they did not meet the requirements, and some were paid without signing appointment letters, which resulted in irregular expenditure;
  • Some vehicles were kept in areas that were not safeguarded at the units, which may result in theft; and
  • Some vehicles were found on the DoD asset register but not in the unit’s register.

(see presentation for more details)

Briefing by Audit Committee

Mr Luyanda Mangquku, Chairperson: Audit Committee, addressed concerns raised with management and the executive authority.

He said the Department did not seem to have an effective system of accountability, where services and divisions were held accountable for resolving audit findings.

There also seemed to be poor appreciation of the responsibility placed by the Public Finance Management Act (PFMA) on the accounting officer -- and by default, on management -- to design and implement effective internal control and risk management systems, whilst ensuring full compliance with all applicable legislation.

Performance in the Department was below expectations when compared to targets, and this area requires attention. The continuing annual escalation of irregular expenditure, from the unresolved compensation of employees (COE) shortfall to SCM breaches, was a serious concern that required urgent attention.

There were numerous concerns within SCM, which was currently located within C-LOG:

  • SCM had the highest number of findings, both from AGSA and the Internal Audit Department (IAD), and had the highest number of unresolved findings.
  • IAD and the SCM compliance unit had reported a number of procurement units with a standing mandate to procure, yet lacking basic SCM training, operating without bid committees, inadequate tools of trade operating without proper delegation, and poor segregation of duties.
  • There were a high number of deviations in conducting procurement, clearly not using the deviation process as an exception for procurement.
  • The delegation to conduct irregular expenditure investigations to the same services and divisions that had incurred and/or failed to prevent irregular expenditure created a possible conflict.
  • The pace of concluding investigations, clearing irregular, fruitless and wasteful expenditure and implementing consequence management was painfully slow and virtually ineffective.
  • The growing contingent liability exposure of the Department required attention and intervention.
  • The Department was long overdue for a comprehensive information communication technology (ICT) infrastructure update to effectively confront the increasing threat to ICT security and cyber security, including the ability to deliver on its mandate in a world empowered by the fourth industrial revolution.

Discussion

Mr Marais said both presentations were riddled with the same problems, such as lack of accountability, respect for the rule of law, and the requirements of the PFMA. The main culprits were the same people, such as the logistic division and the SecDef. There was poor control and management of the divisions. There needed to be a briefing by these divisions because these issues needed to be addressed properly. The SecDef, the Chief of the SANDF and the Minister must brief the Committee on what was happening. Why were they not meeting the requirements? This was not acceptable.

Mr W Mafanya (EFF) said there had to be a decisive engagement to deal with the issues that had been going on for a long time. The internal audit committee had clarified a few things.

The Chairperson said that in February 2021, it had been confirmed that they were implementing consequence management and removing serial offenders from procurement posts for an automated procurement process, with an integrated procurement system aligned with planning and reporting instruments. Further, services and divisions had submitted action plans detailing how they planned to manage and control their weaknesses which resulted in audit findings at the monthly accountability management committee meetings, attended by all chiefs of services and divisions, to give feedback on their status in addressing primary findings. It had been said that there was a fully constructed audit committee attendance at the level of chiefs of services.

In March this year, the Department had said the DOD developed an action plan for each finding issue to resolve, manage and control weaknesses, which resulted in findings being raised. The action plans were then consolidated by the finance division and presented in the monthly accountability management committee meetings, which the secretary shared. The same findings had been produced, with no positive results. The information presented by the audit committee here showed that very little had been achieved since the Department made these undertakings. The Chairperson supported the firm proposal of Mr Marais. There should be a meeting with the Chief of the SANDF, the Minister, the Deputy Minister, the SecDef and the chief financial officer (CFO) of the Department to discuss these issues.

Deputy Minister's comments

Deputy Minister Makwetla apologised for how the reports had been shared with the Committee. In the departments under the Ministry, there were mechanisms to give sight of the challenges faced, and the audit committee of the DOD had done well. In other departments, there was not that visibility. He agreed that a meeting should take place as suggested by the Committee. It was the right approach to look at the audit plan according to the audit committee regarding what had been implemented and what had not. It was true that not much progress had been made so far.

He was concerned with the extension of the Thusano project. There had to be an engagement where all parties agreed to the set conditions for the project extension. This must involve correction of the issues that AGSA had identified. The matter of procurement procedures was a matter of policy. Affording the DOD a different procurement procedure was a privilege which was not new to South Africa. It had happened before. Some of the previous projects that became known had made the citizens of South Africa very unhappy, so there was a need to satisfy not only the DOD itself but the citizens of South Africa.

On the value of money, AGSA would inform them what had been spent as far as the Thusano project was concerned. Regarding procurement under the state of disaster, the Constitution talked about the state of national defence, not the state of national disaster. It articulated what should be done by whom and how, and it was clear that the Thusano project did not fall within the provisions of a state of national disaster. The Secretary of Defence's office was an important one, and the DOD should assist in dealing effectively with the challenges they were facing.

Chairperson's closing remarks

The Chairperson said there were issues that should be resolved and could not wait for the scheduled meeting. The internal audit committee had only three members, which should be six, and this should be resolved. It had been reported that measures were underway, but they had to be speeded up. This issue had been brought up before, and there was still not a fully capacitated internal audit committee. The chief audit executive position had remained vacant since 2019, although it was said that progress had been made. The internal audit division had indicated that there were things that they were unable to do. They were lagging due to capacity issues. This should be considered. It was clear that the DOD was getting worse, evident in the audit findings.

The meeting was adjourned.

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