Defence Portfolio Audit Outcomes: AGSA briefing; with Minister & Deputy Minister

Meeting report

Opening remarks

The Chairperson welcomed the Members, the Auditor-General (AGSA), the Department of Defence (DoD), the Department of Military Veterans (DMV), the Armaments Corporation of South Africa (Armscor), and the Castle Control Board (CCB) to the meeting. He also acknowledged the presence of the Minister and Deputy Minister of Defence and the Secretary of Defence in the meeting.

Draft fourth term programme

The Chairperson said the Committee had not received the guidelines for its fourth term and would consider the draft fourth term programme in the meeting, focusing on only the first three meetings. The reason for focusing on the first three meetings of the fourth term was for the Department to prepare for the meetings.

The first meeting would be on 12 October, where the Committee would present its fourth term programme for adoption and receive a briefing by Armscor on its 2021/22 annual report and responses to the AG’s audit outcomes, as well as feedback on the outcomes of the engagements with Denel and the South African National Defence Force (SANDF) on the final decision on Project Hoefyster and the way forward. The Committee would also receive a briefing by the DoD on its 2021/22 annual report and response to the AG’s audit outcomes, as well as a short briefing and breakdown of the DoD’s spending on border technology, as per the 2020 National Treasury (NT) medium term expenditure framework (MTEF) allocation of R225 million, and the Committee would consider and adopt its outstanding minutes.

The second meeting would be on 19 October, where the Committee would receive a briefing from the CCB and DMV on their 2021/22 annual reports and responses to the AG’s audit findings, as well as a briefing by the DMV on the interventions to remedy their under-performance and under-expenditure. The Committee would consider and adopt outstanding minutes.

The third meeting would be on 26 October, where the Committee would meet to adopt the Budgetary Review and Recommendation Report (BRRR) and consider and adopt outstanding minutes.

Mr S Marais (DA) said other issues could be included in the fourth term, but in terms of the Committee’s obligation towards the consideration of the annual reports and the upcoming MTEF and the BRRR reports, the Committee had no other option but to follow the draft fourth term programme as it was suggested. The other matters could be added later in the term. He supported the draft programme.

Mr T Mmutle (ANC) agreed with the draft programme.

Ms Thandi Modise, Minister of Defence, agreed with the programme.

The Chairperson said the Committee would forward the draft programme to the Department and handed over to the AGSA to proceed with their presentation.

AGSA on DMV annual report

Mr Lourens van Vuuren, Business Executive, AGSA, said they had not received confirmation that the DMV had tabled its annual report. This would be a problem because the presentation from the AGSA included the outcomes from the DMV.

Minister Modise said the Department had signed off on the annual report and it had been sent to Parliament on time, but she could not remember the actual date.

The Chairperson asked the Committee Secretary if he knew anything about the missing information.

The Committee Secretary said they had not received a tabling.

The Chairperson said if the report of the DMV was not tabled, it would cause problems because it could not be discussed until it was tabled.

Minister Modise asked for a few minutes to find out if the DMV's report was tabled from the Director-General (DG) and would revert to the Committee.

The Chairperson said the AGSA must focus on the DoD, Armscor and the CCB in the meantime, and would present on the DMV when the response was received.

Minister Modise said the DMV had tabled its report and was following up on the tabling from Parliament on Monday, which meant that Parliament had signed off on the report that was tabled, and they only needed proof of it. She was certain that there would be nothing to prevent the AG from presenting the outcomes of the DMV in the meeting as all the processes had been followed.

The Chairperson agreed and allowed the AGSA to present on all four portfolios.

AGSA briefing on DoD portfolios

Mr Van Vuuren presented the findings and audit outcomes on the financial and non-financial performance of the Department of Defence (DOD), the DMV, Armscor and the Castle Control Board for the 2021/22 financial year.

DOD received a qualified audit outcome with findings while the DMV and Armscor received an unqualified audit outcome with findings. CCB achieved a clean audit outcome.

On the portfolio performance, he said performance planning and reporting impacted service delivery in the four DoD portfolios. Armscor and the CCB’s quality of performance reports had no findings before and after the audit adjustments, while the DoD and DMV had findings before and after audit adjustments. This was due to the DOD’s inability to support the SANDF's operational requirements, and the DMV’s delayed service delivery to military veterans.

The DMV’s findings on planning for service delivery included that specific information systems were not implemented to enable the monitoring of progress made towards achieving targets, core objectives and service delivery, as required by the public service regulations. Procedures to facilitate effective performance monitoring, evaluation and corrective action through quarterly reports were also not established, as required by Treasury regulation 5.3.1.

In terms of the findings on reporting on the DOD, material mismanagement was reported under programme 2: force employment. The misstatements were mainly related to the classified indicator percentage compliance with combat-ready capabilities available for the SANDF, where it was identified that certain capabilities, such as the special forces medical task team, level 1 medical capability, air medical evacuation team etc., were not supported by sufficient appropriate audit evidence.

In the DMV, material misstatements were reported under programme 2: socio-economic support. The supporting evidence provided for the indicators listed below differed materially from the reported achievement, while in other instances, the AG was unable to obtain sufficient appropriate audit evidence:
-Number of approved non-statutory forces (NSF) received from the verification panel for inclusion in the database.
-Number of military veterans provided with newly built houses per year.
-Number of bursaries provided to military veterans and their dependents per year.

For various indicators, the variance between the planned target of youth and/or persons with disabilities and the reported achievement was not reported in the annual performance report. The planned target for the indicator PPI 204 -- the number of military veterans participating in the pension benefit pilot project -- was the number of military veterans participating in the pension benefit pilot project, while the reported achievement referred to the policy in draft.

Project Thusano assessed the appropriateness of the continued technical and professional services for transport technique provided by a Cuban supplier based on a needs analysis to determine economy efficiency and effectiveness. The payment to the Cuban supplier since 2014 had been R1.2 billion, and the total cost of Project Thusano was R1.5 billion. The overall observation results of Project Thusano included the limitation of scope, as all information was not provided and access to production centres was not granted. Auditors were unable to comprehensively evaluate the economical, efficient and effective provisioning of services for tank and transport techniques on project Thusano. Supplementary agreements to the initial contract were used to directly add or extend services, resulting in open-ended contracts.

The process was not fair, equitable and transparent, because the market was not given an opportunity to participate in the additional procurement. The DoD paid 3.8 times (379%) more per hour than industry norms, which cost an additional R240 million. Training provided for transport and tank mechanical engineers and technicians in Cuba was between 86% and 162% more expensive (R16 million) than in South Africa.

On material irregularities, the AG observed that further financial losses were prevented on inventory and asset management contracts (R250.56 million) and importing the unregistered Heberon drug (R226.85 million). No recoveries were made on losses incurred. This related to lease payments of R108 million and payment of R33.5 million for Heberon drugs.

Completing the disciplinary processes against officials responsible had been delayed for all DoD material irregularities. In terms of the Defence Act, the secretary for defence, as accounting officer (AO), did not have the authority to take appropriate steps to institute disciplinary action against military officials. However, the AO also did not take disciplinary action against civilian officials under her direct supervision. The Chief of the SANDF also did not take any action against military command officials. Because of the current DoD structure and accountability framework, and current implementation of the Public Finance Management Act (PFMA) and the provisions of the Defence Act, the AG had to carefully consider the next course of action regarding these material irregularities.

The AG recommended that the Portfolio Committee should continue to actively engage with all the key role players responsible for resolving the material irregularities and call on them to account for their lack of action. It should request that the role players provide a plan of action with specific time frames for implementing consequence management and recovering losses, which were critical steps required to address the DoD’s material irregularities. It should also obtain an assessment of the Department’s current accountability framework to understand the challenges and possibly provide guidance on how the limitations/challenges could be resolved.  

See presentation for further details

Chairperson's comments

The Chairperson found the last slide detailing what was expected of the Portfolio Committee interesting, in that it had also audited the performance of the Committee, and he welcomed that because the Committee was part of the accountability ecosystem. It would be up to all the members of the accountability ecosystem to press forward in ensuring accountability in each of the members of the ecosystem. He would allow Members to ask only clarity seeking questions because they could not debate the AG’s report and the Minister would make concluding remarks.

The Committee expected the Defence portfolio to invite their internal audit teams when they present their annual reports in the fourth term, and there must be confirmation that the audit committees were invited to the meetings, because there were sections in the report that could not be presented by the AG nor the Accounting Officers.

He requested the Secretary of Defence to improve her audit committee, as it had only three members due to one of them passing away and the contracts of two additional members had ended. He urged her to add more members to the audit committee so that this would not be an issue when the Department had to account to the Committee in the next term. The DMV must also correct its audit committee challenges so that it would not be a problem in the next term. The CCB had been impressive in the 2021/22 financial year and must be commended for its performance, and Armscor also did very well, even though there were minor challenges.

Discussion

Mr Marais asked for clarity on the performance indicator where it was stated that the United Nations (UN) funding was reliant on contributions from donor countries. According to his understanding, it also depended on the serviceability of the country’s equipment, but that was not featured in the report. He also wanted to know whether the 1 Military Hospital's repair and maintenance programme (Ramp) was part of the audit investigation, and if nothing had been found by the AG, as the project was clouded with several issues and irregularities.

The AG had also requested another meeting with the Portfolio Committee. When would that meeting take place, and what would it be about? One of the biggest issues raised in the comments made by the AG related to no appropriate action being taken and no consequence management actions taken.

It was frustrating for the Members, because many of the issues raised were repetitive over the years. There was no real action taken nor referrals by the AG to a prosecuting authority for any action to be taken against anybody. Where did this leave the Portfolio Committee and the AG if continuously no consequence management actions were taken? What were the timelines before real action could be taken? It was frustrating that the issues seemed to be let go without any consequence management action taken year after year.

He wanted to know if the material irregularities found on the Project Thusano referred to the two major projects, because there had been a contradictory response to one of his questions, which stated that the problem was not with Thusano, but only with one sub-contract with Cuban Medicine. Was this the case, or was the problem with the entire Thusano Project? What should be done with such projects when there were clear violations of the PFMA and National Treasury regulations?

On slide 20, the AG mentioned that one third of future payments would go towards expenditures of the past. Was this a healthy practice? Would this not affect future commitments negatively? The Defence Force must at least have a medium-term framework that could be acted upon in terms of capital, equipment, and commitments.

Mr T Mmutle (ANC) wanted to know what the Department could do to deal with the irregular expenditure, because if nothing was done, the material irregularities would continue to increase rapidly.

AG’s Response

Mr Van Vuuren said the irregular expenditure could be removed only once all the actions were taken as required by the PFMA, so the investigations must be done, and the individuals must be held accountable. In some cases, there may be condonements, but in other cases, once all the investigations were done and the actions were taken, the Accounting Officer would have the ability to remove the irregular expenditure.

Regarding the UN funding, he said the information in the slide was taken exactly as it was articulated in the performance information of the Department and was not the AG’s own words. He agreed that serviceability could impact the ultimate income of the project, and that there could be other factors as well.

Forensic investigators investigated the 1 Military Hospital Ramp project and made certain recommendations, some of which were related to criminal action. It was part of what the AG had reported as consequence management action that must take place. Other roleplayers were involved in the 1 Military Hospital Ramp project, such as the Department of Public Works and Infrastructure (DPWI).

The AG would follow up on the extent to which the recommendations were implemented during the audit process. There was also some fruitless and wasteful expenditure that also emanated from the project, and the AG would follow up to ensure that it would be included in fruitless and wasteful expenditure. Some of it related to medical equipment included in the financial statements. 

He could not give a specific date regarding the further meeting with the Portfolio Committee, but it was important for the AG to engage with the Committee as soon as possible. They would reach out to the Committee as soon as they received all the information. It was critical for consequence management to happen, and it was the responsibility of the various role players to enforce the consequence management action. The AG would continue reporting on consequence management not taking place, because it was a requirement of the legislation for it to take place.

The total cost of Project Thusano was irregular expenditure, because no supply chain management (SCM) process had been followed to repair the military vehicles and procure the Heberon drug. It was true that all the expenditure that would still be incurred from the project would automatically become irregular expenditure.

One of the recommendations made by the AG to the accounting officer was that the AO must investigate the contracts and determine other appropriate ways to deal with the need to repair the vehicles and evaluate and ensure that the contract was to the mutual benefit of the DoD. Some of the supplements were open-ended, so it was important to ensure that the Department worked towards a situation where the supplements had definite end dates and amounts in monetary value as to how much could be spent in the contracts.

He said it was ideal for a department to spend their allocation for the year within that financial year, but it was not practically possible because there were always invoices that were received close to year-end and could be paid only with the allocation for the next year. However, it would have to be limited to that, and not be an issue that would grow for several years to the extent that a department would have to use one third of its new budget to pay for the previous year's expenditure. This was a major contributor to putting departments in difficult financial situations, because it made it difficult for departments to meet their targets for the current year.

There were preventative controls that could be put in place to avoid the recurrence of irregular expenditure. These included the implementation of audit reports, the compilation of audit action plans, and the investigation of where the preventative controls failed and why they failed. Appropriate action must be taken to ensure that the failure would not recur. If a matter was deliberately circumvented, then disciplinary action must be taken. If a control was not in place, then the control must be immediately put in place and monitored.

He said it was critical that the internal audit unit audit the procurement processes to test the controls to ensure that they were active throughout the year in environments with significant irregular expenditure. That was the only way irregular expenditure could be limited for the future, and consequence management was important to ensure that there were no repeat transgressions by individual officials.

Mr Marais asked what the timelines for actions to be taken by the AG or the Portfolio Committee were in the case that consequence management action continued to not be taken by the DoD, and what actions had to be taken in that regard.

Mr Van Vuuren replied that the AG was looking at different avenues to deal with the recurrence of material irregularities in the DoD. There was a difference between the Defence Act and the PFMA on implementing consequence management, which was one of the reasons the AG requested a separate meeting with the Portfolio Committee to discuss the way forward. It was important for all role players to focus on appropriate action to be taken, and there was still no legislation that prevented any of the role players from acting. The only difficulty was that the Secretary of Defence did not have the powers to act against military members, but that did not prevent her from acting against civilians who reported to her.

The Chairperson said if the problem of the duality of accounting authorities in the Department caused challenges, it meant that when the laws were passed, the situation was not anticipated. If it was not resolved by amending the law, there would not be any other way of dealing with it. One could never be too sure whether the reason for the lack of consequence management had to do with the limitations placed on the Secretary of Defence by the Defence Act, or if there was simply an unwillingness to act and hiding behind the “dual accounting authority.” The reality was that there were no outcomes in the end.

Minister’s concluding remarks

Minister Modise said she was also worried about the lack of consequence management action in the DoD, but the powers conferred upon the Secretary of Defence enabled her to be elaborate in the instructions to the Chief of Defence on what and to whom it should happen. It was a route that was less travelled, because there were no copies of specific instructions from the Secretary of Defence to the Chief of the Defence Force outlining the expectations and actions to be taken. This led her to give the Secretary of Defence deadlines to report to her on the actions she took to ensure that specific departments within the DoD were performing accordingly.

She said the Department should consider going through the route of getting the Chief of Defence to act before amending the legislation, because they had not actually done what was needed. The problem was that they nursed each other too much in the Department, and there was somehow a belief that there must be a board of enquiry before someone among the uniformed officials could be taken to account. She did not think this was necessary for matters relating to financial delinquency, misconduct, or pure maladministration.

She agreed with the sentiments shared by the AG and the Committee, and noted that the Department must pull up its socks and do what needed to be done. She thanked the AG for continuously saying what needed to be said without beating around the bush.

The Chairperson thanked the Minister, the Deputy Minister, the Secretary of Defence, the AGSA and the delegations from DoD, DMV, Armscor, and CCB for availing themselves to the meeting. The Committee remained indebted to the office of the AGSA, because they were a tool in the arm of legislation and the Committee would continue to use them as a tool to deepen oversight, to improve the benefits to the electorate.

Adoption of minutes

The Committee adopted the minutes dated 31 August, 14 and 21 September, with no amendments.

The meeting was adjourned.