Defence Portfolio Audit Outcomes; DoD & Armscor 2022/23 Annual Report

Meeting report

AGSA on defence portfolio audit outcomes

Ms Mbali Tsotetsi, Deputy Business Executive, Auditor-General of South Africa (AGSA), briefed the Committee on the audit outcomes of the Department of Defence (DoD), Department of Military Veterans (DMV), and the Armaments Corporation of South Africa (ARMSCOR). The audit outcomes revealed that the DoD had remained qualified with findings on compliance with laws and regulations and performance reporting, similar to the previous year. The audit outcome for ARMSCOR, a defence acquisition agency for the South African government and its allies on the African continent and the world, also remained consistent with the previous year, as they had obtained an unqualified opinion with findings.

Based on the annual performance report, 15 of 29 planned targets were achieved for 2022/23, which represented a 52% achievement. The AG had previously found that in comparing the Cuba contract cost for the vocational courses with the local market costs, it was 136% more expensive to study in Cuba than in SA, and the Department could have saved an estimated R122.3m over the period of the medical students’ studies (2014-2028) if the 79 students were studying in SA and not Cuba.This would have released funding for other competing priorities, given the tight budget the Department was currently experiencing.

Various other contracts the DoD was party to, which had a total value of R554m, were also found to be non-compliant with procurement legislation. Meanwhile, irregular lease payments for unoccupied buildings had been referred to the Public Protector for action after the Department had not applied consequence management in this regard since 2021.

(See presentation for details)

DoD Annual Report 2022/23

Dr Thobekile Gamede, Acting Secretary of Defense, said that the main challenges the DoD and the South African National Defence Force (SANDF) faced were deteriorating defence capabilities, including border security. This was due to the lack of funding to address the regressive conditions, material financial losses, fruitless and wasteful expenditure, procurement which was not always cost effective, and the lack of timely consequence management (e.g., prolonged suspensions). The AGSA had reported that if the funds allocated to the Department were not utilised optimally presently and in the future, this may impact negatively on the lived experiences of the citizens of the country and on the Department’s ability to support peace keeping operations conducted to protect the country.

Operation Thusano was an agreement with Cuba that had seen payments to the tune of R1.4 billion made to the Caribbean nation by the DoD. The contract had been cited as irregular for the past two years. This irregular expenditure was one of the reasons the DoD and DMV received a qualified audit again. The Department had spent another R308 million on the bilateral contract for medical and military training and the repairs for its vehicles by Cuban mechanics.

(See presentation for details)

ARMSCOR Annual Report 2022/23

Adv Solomzi Mbada, Chief Executive Officer (CEO), ARMSCOR, said the core function of the entity was to acquire defence materiel and related services, primarily for the SANDF, but also for other government departments and services, with permission from the Minister of Defence and Military Veterans. During the reporting period, ARMSCOR managed and executed contracts to a total order value of R17.22 billion for the DOD. The continued decreasing funding allocation for projects in the Special Defence Account (Capital Budget) resulted in only eight capital projects with a funding allocation for the year. A total of 22 capital projects were being executed due to funds being carried over from the 2021/22 financial year.

ARMSCOR’s financing was mainly through income appropriated by Parliament and received via the Defence budget, which consisted of an allocation and payment for services rendered to the Department of Defence. The funding was insufficient to sustain the required capability and was supplemented by income from commercial services rendered, investment income and other income.

(See presentation for details)

Discussion

Mr S Marais (DA) asked the AG whether there were guidelines set out in the Public Finance Management Act (PFMA), or if there were AGSA prescriptions that dealt with the awarding of tenders. In other words, was a tender always awarded based on a points system, or would it be awarded based on the cost at which the service provider was willing to render the service?

Mr T Mmutle (ANC) commented on the AG's report that Samil trucks preserved through Project Thusano were not stored in an acceptable state for deployment because most of them were resting on trestles with no wheels. He pointed out it was difficult to preserve an immobile vehicle without removing the tyres, otherwise the tyres would end up damaged, so was there another mode of preservation that the AG had recommended or prescribed to the Department that would keep the vehicle and all its parts in good order?

Regarding the cost of training students in Cuba versus South Africa, did the AG consider exchange rates as a factor when making their assessment? Also, did the AG look at the areas of expertise the defence force was investing in by sending students to Cuba, and whether they had them internally or not? These skills and expertise may be sourced elsewhere because they were unavailable in the country.

The Chairperson commented that the contract for the environmentally controlled warehouses built for the preservation of defence equipment and systems had not been renewed, so the defence equipment and systems were exposed. The idea of keeping equipment in preservation was for the purpose of ensuring that it was ready for deployment at any time. If they were not in a state of preservation, then in some cases, they would deteriorate. A case in point was the aircraft under Denel. If those aircraft were not properly preserved, their systems would experience malfunctions. Preservation was a serious concern, and it affected 66 of the warehouses.

Mr W Mafanya (EFF) said that the closing balance of irregular expenditure continued to grow. Why had there been an increase in irregular expenditure every year since 2018, whereas the AG had a mandate to enforce stronger accountability and governance in the public sector? Where was the AG going wrong?

AGSA's response

Ms Tsotetsi said there were regulations that guided how departmental entities should evaluate tenders. The guidelines involved a point system which considered the cost of the tender and other requirements, like looking at the compliance with the broad-based black economic empowerment (BBBEE) policy, but the cost of the tender had a higher weighting in terms of the assessment.

In instances where there were deviations whereby the Department chose a specific supplier, they were still required to assess whether they were getting value out of the agreement with that chosen supplier. They must assess the cost benefit, which investigates whether anyone else could provide that particular service or good in a manner that was cost effective for the department or entity.

On the preservation of the Samil trucks that the AG had looked into, specialised performance auditors had been assigned to conduct a performance review on the matter, and they had concluded after careful observation that the way that the vehicles were preserved indicated that they were not ready for deployment. She stated that they did not have all the information required of them to expound in detail on their recommendations to the Department in terms of how to better preserve the vehicles, but they would provide that information to the Committee in writing.

On the cost benefit analysis conducted by the AG on the training of South African medical students in Cuba, the AG did consider the exchange rate when determining their analysis on how much the Department would have paid in rand value if the students were trained in the country versus the cost incurred in dollars when the students received their training in Cuba. One of the challenges in determining whether South Africa had greater expertise and capabilities than Cuba when it came to training students was that there was a lack of a needs analysis to inform the AG about how the Department had concluded that medical students were better off trained in Cuba rather than in South Africa. If the AG could access this needs analysis, it would help the auditing team better understand the considerations behind the Department’s decision to send the students to Cuba.

The reason for the increasing irregular expenditure year on year was partly due to the lack of a culture of consequence management being implemented in the Department. The AG highlighted the Department because they were the biggest contributor to the portfolio's irregular expenditure. Consequence management entailed the process of investigating and finalising investigations, because this was when the accounting officer would be able to identify the responsible parties. Once the responsible parties have been identified, action must be taken.

The AG was implementing its enforcement mandate, but the extent to which enforcement could be effective was limited if the accounting officer was not exercising the responsibilities required of him or her in the PFMA. These responsibilities required them to deal with any irregular expenditure or other irregularities incurred by the Department. The core challenge therefore was the implementation of consequence management from the time that it was detected that there was an irregularity to ensure that subsequent to that, investigations were being done immediately and that they were being concluded on time. In some instances, investigations had taken place, but they were in progress for prolonged periods of time. People were on suspension for long periods of time without action being taken. If this could be resolved, then the Committee would see a reduction, because these amounts could be condoned only once all of these processes had been implemented. If the processes were not complete, National Treasury would not allow for any condonement.

Discussion

The Chairperson noted that the Department would speak on the condonement process, because a discussion was ongoing with Treasury to have some amounts condoned, especially the expenditure that had to do with the compensation of employees, which made up two-thirds of the irregular expenditure. The issue of compensation was beyond the Department’s control, because it was a function of the underfunding of the Department. They had had to overspend their compensation for employees for over five years, so this had been an accumulating expenditure over time. This year, the situation was even worse, because they could not absorb the amount from within the budget, which created shortages in the budget in its entirety. The situation was very bad in the Department.

Mr Marais noted that there seemed to be repeated cases of irregular expenditure, and some of those cases had been handed over to the Special Investigating Unit (SIU). The problem was that the Committee did not see any consequence management being implemented, other than referrals. There had been a requirement from the AG to the Department that the money that was paid for irregularly procured Interferon (Heberon Alpha-2B) from Cuba at the start of the Covid-19 pandemic at a cost of $20 million, of which $2 million was irregularly paid, had to be recovered. Was the AG following up on this case, or had it been condoned and written off? Also, what did the AG do about instances where there were recommendations to an entity, but the entity’s response was extremely delayed, or it ignored the recommendation completely? He asked if the AG could provide the Committee with the number of cases referred to the SIU.

Could the AG comment on their recommendations concerning the issue of the delayed appointment of the Secretary of Defence and the Chief Financial Officer? It had been close to 11 months since these positions had not been filled by permanent candidates. Were there discussions between the AG and National Treasury on the AG’s findings and recommendations? Why had the material irregularities not been condoned yet, and the over-expenditure of R15 billion? Could the Secretary for Defence give the Committee feedback on the appointment process of the positions that needed to be filled permanently? What was the progress in this regard?

The Public Protector’s report had made recommendations for remedial action, and there was a set period within which the DoD was supposed to respond. The report had been published at the end of last year. What remedial actions have been implemented by the DoD since the report was published? Also, the United Nations' peacekeeping mission was in the process of withdrawing its troops from the Democratic Republic of Congo (DRC). They were supposed to be out of the DRC by next year. What role was the DoD playing in the mission, specifically as troops were being withdrawn?

Why had the Committee not seen any significant savings in the compensation of employees due to the mobility exit mechanism (MEM), which was a voluntary exit mechanism operating within the Department? It was a process intended to lead to a tangible rightsizing, realistic succession planning, guarding against an exodus of scarce skills and advising defence force members on career progression. The fact was that the MEM was not cutting costs in terms of employees, and this was impacting the country's defence capabilities, and its preparedness was deteriorating at a fast rate. Travel and subsistence were one of the issues that National Treasury had mentioned, and they believed that costs could be cut down in this regard. Were costs being cut, or were the expenses still being maintained without considering Treasury’s recommendation?

The Minister had promised that the Department would organise a defence industry lekgotla either at the end of last year or the beginning of this year. This had not been realised. Was there any feedback on when the Committee could expect the lekgotla to happen?

Was there any progress on the R33 million that must be recovered in terms of the AG’s recommendations?

Mr M Bond (DA) thanked the AG because the report had been very helpful in terms of demonstrating economic effectiveness and the current way that the Department was being run. This was also demonstrated by the Department’s report, which had been very honest. The biggest take away from both reports was that the whole Department needed to be re-evaluated.

Mr Mafanya commented that the AG had told the Committee that most of the issues were sitting on the accounting officer’s desk, which was why she could not make any progress. The DoD had proven this to be the case in the report presented in the meeting. Almost 80% of the report contained information that was not new. It was a regurgitation of issues from the past that the Committee was well acquainted with. The DoD’s report should have been handed over to the AG so that in her responses, she would have been able to answer on the lack of progress. The DoD’s report said there were issues in the procurement process -- the question was, who was expected to fix these issues because this had been a problem for many years.

On the issue of unit commanders who were not performing their command responsibilities regarding resource management, whose responsibility was to rectify this problem, because if you were employed and were not performing your responsibilities, you must be fired. There must be consequence management implemented in terms of this issue. There was also inadequate resource management within logistics -- who was responsible for this? There must be someone accountable, and they must be dealt with. Instead, the DoD was complaining and expressing their grievances to the Committee, but who was responsible for dealing with these issues? The 19 bridges that were supposed to be built had not been built because the engineers had to wait for three months before construction could begin so that the Department of Public Works and Infrastructure (DPWI) could provide funding for the project. This meant that the engineers were not doing anything for three months but were earning a salary. There were also excuses for the delayed construction, such as unfavourable weather conditions. These were unacceptable excuses.

The report stated that soldiers lacked man-hour training because of the scarce availability of aircraft in the vicinity, and the budget constraints had denied access to aircraft to soldiers. Could the DoD explain this issue further? The report also states that the Department had poor record management. This made the Department susceptible to looting because there were no records to ensure people accounted. Could the DoD provide clarity on this issue as well?

Mr Mmutle referred to the two-thirds of irregular expenditure because of compensation of employees, and said that if it were within the Committee’s powers. This expenditure would have been condoned without any fear of contradiction. Apart from conducting an audit, how was the AG assisting the Department with the understanding that this irregularity did not amount to negligence or disregard the legislative framework? There must be a solution that leads to a condonement.

The issue of deviation was now a culture within the Department. The DoD did not seem to be emphatic on how best it was going to deal with this matter. For instance, it had not ensured that it had measures in place and timeframes to fill the vacuum caused by a contract that had lapsed. The Department’s track record shows it could delay over two years without a contract. These delays did not help it to avoid these deviations, which was concerning.

When the Committee asked the DoD to account, it was told that it was generally acceptable that processes move slowly. Who was responsible for making processes move faster? Who must attend to these issues? One of the Department’s biggest procurement centres had no permanent officer to account for issues. There was always an acting officer who could tactically delay. There must be timelines to make things happen, and if those timelines were not achieved, then that would be insubordination and people must be replaced. In slide 61 which compares the performance with prior years, there was a decrease in targeted achievements. How did the DoD allow this to happen, despite budget constraints which were not new? The Department had been able to perform in previous years regardless of budget constraints. What was the reason for the decline in performance?

On the procurement of equipment that had not been used for over four years, he said that if the Department wanted to put the equipment to use after so many years, the equipment would not function properly, because systems become outdated if it was equipment that used technology. Why would one procure equipment if one did not have the capability to use it? A needs analysis should have been done before making the purchase. This exposed the role of the DoD’s internal audit.

AGSA's response

Ms Tsotetsi referred to the recovery of the R33.5 million that was paid to acquire Heberon from Cuba. She said the matter had been reported to the Special Investigating Unit (SIU) for further investigation to identify the responsible parties and address the recovery. The AG was not writing off the issue of recovery, but it had been noted that the issue would be addressed through the investigation by the SIU who had a mandate to ensure that the money was recovered.

Where the AG has issued material irregularities (MIs), it follows up on those irregularities to make sure that the accounting officer was indeed taking the necessary action and if they were not, the issue would be escalated to the next step. The AGSA would go back to the committee which was tasked with looking at the MIs, and then make recommendations on what needs to be done. In terms of enforcement, therefore, the AGSA was playing its role in dealing with the matters that the accounting officer did not address. However, some matters were not part of the MI process, and the AGSA would then make recommendations to the accounting officer to deal with them, because it was within their job description and part of their responsibilities in terms of the PFMA. The AGSA would provide the details of the SIU referrals to the Committee, and welcomes its suggestion to call on public bodies so that they could account and give progress reports on the matters that the AGSA had referred to them.

The AGSA was also concerned about the prolonged acting roles within the Department. One of the roles highlighted during the audit was the post of the chief audit executive from the internal audit unit, which had been an acting position for years. After the audit was completed, one of the recommendations was that the DoD must fill the vacant positions. The Acting Secretary of the DoD had accepted the recommendation, and it was part of her commitment going forward.

When AGSA audits, it considers the cost containment instruction by National Treasury, and there is engagement with National Treasury around irregularities. National Treasury was also the AGSA’s auditee. AGSA also audits the consolidated financial statements of the country, and it makes recommendations to National Treasury which would include areas of unauthorised expenditure. In this regard, the Standing Committee on Public Accounts (SCOPA) should deal with unauthorised expenditure. National Treasury would then have to present to SCOPA on what needs to be done to deal with this unauthorised expenditure, because it must be funded for it to be written off in the financial statements of the DoD.

DoD's response

Dr Gamede said that the remedial action as far as the medical training was concerned, was being implemented. All the information regarding the remedial action taken had been filed with the Public Protector. The matter that was still outstanding was the issue of consequence management. This was why the matter had been referred to the SIU, so that they would be able to identify exactly who should be held responsible, and whether the money should be recovered or not. When they identify the person that should be held responsible, the DoD would follow up with its own accountability measures against that person or persons.

Referring to the issue of the UN peacekeeping mission, she said there was no official document as such. There were discussions at a certain level, but nothing tangible authorised the withdrawal of peacekeeping troops from the DRC. It was therefore difficult to deal with this matter if there was no soft document that one could use as a source of reference.

Regarding the MEM, the Department still needed to rejuvenate, and the jury was still out on whether this exit mechanism would be utilised to cap the cost of employees. It might look like the amount would increase, because the entity was paying the departmental debt from previous years. However, if the Department sticks to its projections, the cost should be capped by 2025. The cost looked like it was increasing for now, but eventually it would stabilise.

The Department was implementing the cost containment measures that National Treasury directed, and that put a cap on how much one could pay for accommodation and travel expenses. Part of the DoD’s responsibility was defence diplomacy, and this takes quite a sizable amount of money, but it still had to be done because defence diplomacy was important. The DoD took the decision a while back to reduce the number of delegations flown out to ensure that it could continue with this function, because it was important.

The industry lekgotla was supposed to happen. The SecDef said she would follow up with the Minister to find a suitable date for the lekgotla.

The AGSA receives the first draft of the report, and they communicate with the DoD when they are auditing it and then issue their own report, which they issued on 1 August. The AG does not allow the Department to publish the report without their having approved the corrections that need to be made to the report, so it had always been made available to the AG.

In terms of a needs analysis when it comes to procurement, training was provided to a delegation on how procurement was done. If the Department finds that there are problems, the recommendation is that the Department withdraw the delegation. Deviations were signed off when a matter was urgent or there were emergencies.

She welcomed Mr Mmutle’s suggestion for the AG to assist the Department on irregular expenditure matters and their request to National Treasury for condonement.

Regarding the acting positions of the Secretary of Defence and the CFO, she said that the Department had advertised both posts. There had been an attempt by the Minister to shortlist the potential candidates for the position, but there was not a big enough pool of candidates for the CFO post because part of the job requirements entailed that the candidates needed to be chartered accountants. There had been only two candidates with the required skills. The Chief of Human Resources (CHR) had been permitted to headhunt for a qualified person, instead of using the traditional route of finding candidates.

Follow-up discussion
 
Mr Marais commented on the Special Defence Account (SDA), pointing out that R8 billion of the R10 billion was money taken from the SDA. A condonement did not mean that the money had been recovered. That money was for the purposes of procuring prime mission equipment which had now been lost. Would this loss be addressed separately from the issue of condonement? The Committee had received information about the reserve force mandate in terms of what was spent and what was budgeted. Could the DoD provide the same information on the Public Service Act Personnel (PSAP) and the Military Skills Development System (MSDS), and the remainder would be the regular force? With the Department’s performance sitting at 52%, would there be any bonuses this year? Also, letters had been sent by the Director-General of National Treasury to cut budgets -- was the Department also expected to cut costs further?

The Chairperson said that the purpose of the meeting was to check if Armscor was able to respond to the Committee’s concerns in the previous year. The entity’s performance indicators were process focused, and as an oversight committee, they were not helpful to the work this Committee did. The report said nothing about Armscor’s performance.

How were they managing their contracts, and what deliverables were they bringing to fruition? These were the questions that the public was interested in. Armscor’s responsibility was to deal with acquisition, maintenance, and disposal requirements of the DoD. This was Armscor’s main mandate. These contracts must respond to the main mandate.

The lack of aircraft suitable to grace the sky had increased drastically. The number of flying hours of the military was extremely poor. The hours had been reduced from 15 000 to 12 000 hours. The sea hours had also been reduced, but the navy could not even meet the current target. The fellows who were supposed to be servicing aircraft were leaving the defence force in droves because they needed to be in the air to maintain the conditions of their licences. If there were so many aircraft on the ground that were not being used in the air, one had to ask where the people were who were supposed to be piloting these crafts. They had all left. This was a serious problem. This explained why the coastal patrols had decreased to four times a year, but unfortunately, they could meet only half of the set target because of the serviceability of the platforms.

How could the Committee see Armscor’s performance translating to the defence force’s ability to restore its capabilities? The problem was that the Committee could not decisively measure the entity’s performance using the report. Why was it difficult for the entity to report on its working progress? For Parliament to be able to appreciate the entity’s performance in relation to availing more funding, the entity must meet them halfway in terms of how it was accounting for its performance.

Mr Marais concurred with the Chairperson’s response to the Armscor delegation. He said the Committee’s objective for Armscor was to prevent it from becoming a failed state-owned enterprise. The main requirements that Armscor was responsible for were procurement, agency, dockyard and research. If these requirements could not be translated into the defence force’s improved performance, then the question was whether the country needed the services of Armscor, or if the defence force should do its procurement internally. This was the acid test for the current and future existence of Armscor.

The Committee needed feedback on all the contracts. The country’s Cessna Caravan fleet was grounded, and of the Pilatus aircraft needed in Langebaanweg Air Force base near Cape Town, only about six or seven of them were serviceable. How could one train the pilots if they did not have maintenance on the aircraft? Those were the important things. It was embarrassing to find out from the media that the Falcon aircraft of 21 Squadron were grounded because of service contracts. This kind of information must be relayed to the Committee from Armscor, not the media.

If we looked at the Armscor board, it was earning a lot of money, but the Committee could not see the value of this money. Could the board provide the Committee with the financial statements including all the expenses incurred?

At one stage, there was a problem with the Special Defence Account (SDA) versus the General Defence Account (GDA) funding in terms of rollovers for multi-year projects. Had this problem been sorted out? There was a point in time when the Committee had been told that this issue had been resolved, which meant that Armscor was able to have multi-year commitments. On the Hoefyster project, the entity had spoken about phases, but it had not spoken about what these phases actually entailed.

The Committee was concerned not about the silos in which the entity was operating, but rather the holistic and bigger picture related to how the entity reinforces and strengthens the defence force for each primary target. He emphasised that, in his opinion, the entity was of value and its work was required, but it needed to get its funding in order. If there was a reduction in the commitments of this year’s budget, this would impact the entity directly, so it was important to know now how the entity would reposition itself to prepare for the impending reduction.

Mr Mmutle also concurred with the remarks made by the Chairperson. However, it was important that the Committee remain consistent when deliberating on the issues around Armscor, because it was the Committee which had once suggested to the entity that they should take up commercial opportunities for their own sustenance. The Committee could not contradict itself and later say that the entity was too focused on commercial opportunities as opposed to supporting the defence force.

He reiterated that the Committee's first priority was supporting the defence force. How best could they ensure that they executed this mandate? It also boiled down to the issue of availability of resources. The entity’s delay in ensuring that resources were available and serviceable on time for the contracts that were available for them, was something they needed to be clear about. There must be mutual engagement and planning between the DoD and Armscor, because there was a clear problem in the lines of communication between these entities.

If they continued to plan in silos, the problems they were currently experiencing would continue. The Committee could not expect Armscor to refrain from reporting on their own targets which had been achieved, but at the same time, the problems that the arms of service that they were supposed to be supporting were faced with were not being addressed, and this should be the primary concern because that should be Armscor’s main priority. They needed to go back to the drawing board and ensure that there was integrated planning between themselves and the arms of service so that they were aware of what was expected in the next financial year and how to achieve their targets.

Mr Mafanya said that the country was coming from a situation where Denel had completely collapsed to the point where they could not pay their staff their salaries. The survival of Armscor depended mainly on Denel. By the time the Committee did their oversight on Denel, it automatically indicated that Armscor was also on the verge of collapsing. The reality was that Denel had lost skilled people who had been an asset to the organisation. Minister [of Public Enterprises] Pravin Gordhan had alluded to the fact that Denel was currently initiating a recovery strategy. While Denel was still planning its recovery strategy, Armscor was still expected to perform its mandate. The Committee knew that Denel could not make much progress due to the reduction of budgets. The unfortunate case was that Denel had been the one to blame for its own collapse because they had misled the Committee by painting a rosy picture, as though their situation was beginning to look better at the time, which was not true. When the Committee had visited Armscor’s facilities, such as the dockyards, it had found that these facilities were underutilised because there were no orders given.

In this context, it made sense that what one sees on paper in the reports and what one sees on the ground were two different scenarios. This was why the Committee had insisted that there was a problem. There was a need to take the defence force and its needs very seriously, and in doing so it entailed what Mr Mmutle had said -- that the defence force and Armscor must have integrated planning sessions and collaborate in order to target certain priority areas.

Mr Bond asked the delegation from Armscor whether the defence force was combat-ready to defend the country if necessary. If not, what was Denel and Armscor doing to assist the defence force?

South African Defence Force (SANDF) response

Maj Gen Thembelani Xundu, Chief Director: SA Army Corporate Services, commented that there was a results-based model on slide 39 of the presentation. This model informed the business architecture of a public entity like the DoD and Armscor. Armscor should follow the National Treasury revised frameworks, because it would force them to use that results-based model, where one measures at the level of results. Before this model was introduced, government was using an outcomes-based model, but now it was measuring results.

Armscor existed, according to the Act, because it was the sole acquisition agent of the DoD to equip the force and sustain that particular equipment. However, the situation was such that the equipment was down, but the entity responsible for ensuring that the equipment was kept operational and modernised was over-performing. There was a clear disjuncture around the business architecture of Armscor, particularly when aligning its appetite to explore commercial avenues to keep afloat with its mandate in terms of the Act.

Last week, the SANDF and the DoD started with an environmental analysis. For the first time, the analysis had looked at the defence industry directly and not through Armscor. There were approximately 3 000 companies in the country before 1994, mainly in the defence industry, across many capabilities. In the new dispensation, the number had shrunk to 120 companies, and Denel was the 120th. Almost all the other 119 were viable, except Denel. The 119 could satisfy 70% of the SANDF's requirements, yet for their survival, they had an export portfolio of about 75%, meaning they were viable. They straddled across the domain capabilities of the SANDF, be it in the aerospace environment, land force, cyber, and so on. It was therefore not a true reflection of reality for one to say that the defence industry in South Africa had imploded. This was not the case -- one should rather say that Denel had imploded.

The business value chain of defence as a portfolio had a causal relationship, whereby the DoD depends on Armscor, and Armscor depends on Denel. The demise of Denel had been expected for a long time. When they presented their annual report in 2010, the DoD told them that their business model was not going to help the South African army at that point in time, particularly on Project Hoefyster. The first people who were supposed to have that kind of intellectual diligence and vigilance was Armscor, but it had lost the capability to foresee the downfall of just one company like Denel.

Armscor's response

Dr Phillip Dexter, Chairperson, Armscor board, commented that the easiest part of the entity’s work would be adhering to the reporting methodology requested by the Committee. The biggest issue relating to the defence ecosystem was where the entity should really be focusing, because the reality was that Armscor was a state-owned company (SOC) dependent on the government for funding. This funding sustained the SANDF, and if the entity had a declining budget, it would not be able to meet the SANDF’s needs. This was a political issue that the government must address. If the government did not spend money on the SANDF, Armscor would not be able to do anything because that money affected the capability of the SANDF. The question was whether Armscor was spending the money properly. That was the issue that the entity had to account on.

Armscor had had interactions with the Minister, and one of the things that she had promised was to initiate an indaba for the defence industry. It was absolutely critical that this indaba take place, because there were good companies in the country who could service the SANDF. However, two things were constraining them. One was the question of the budget, because they needed to be paid to do the work, and second, was the issue of Denel. It was the elephant in the room. The question was whether there was a strategy that could turn things around for Denel, because if there was no strategy, it would impact the rest of the industry.

There must be a platform where one interrogated why Denel had failed. The Committee must also understand that the entity’s desire to focus outward was not driven by wanting to neglect the SANDF. It was a matter of survival, because as the budget declines, the entity had to derive an income from somewhere else, otherwise the country would lose the capabilities that Armscor has. It was not the scenario that the entity preferred. It would be far better if the budget covered Armscor in totality. The board would like to request some time to have a discussion with the Committee. His faith in the state as a Marxist had been severely shaken by his experiences in state-owned entities and government. Armscor was run on very strict lines, so it was one of the better institutions they had in government, and preserving its capabilities was important in order to sustain the country’s defence.

Adv Mbada stated that for the refit of the two submarines and the frigate, R1.4 billion in funding had to come from the National Treasury in this current financial year. The entity was given that requirement in June/July. It would be finalising the procurement process at the end of October for the service providers responsible for the refit programme, so that was the time it had taken to service the frigate. This illustrated that maintenance boiled down to accessing funding to pay service providers, and the same would apply to servicing the Air Force fleet. The current budget that had been given towards this effort was the same amount that Denel had been given in 2007, so there were issues in the maintenance of equipment which could be attributed to budget constraints and contractual obligations entered into during the previous dispensation.

The Chairperson thanked the officials for their time and emphasised that the Committee would be monitoring the performance of the DoD going forward.
 

Committee matters

The Committee adopted its programme for the balance of the term. This would include:

• Department of Military Veterans (DMV) and Castle Control Board (CCB) presentations;,
• An update on the Umzimvubu Regiment matter;
• The Budget Review and Recommendations Report for 2023;
• A briefing by the content advisor on the Commission for Gender Equality report on the Maputo protocol;
• An update on the consequence management of the DoD concerning irregular, fruitless, and wasteful expenditure;
• An update by the Marshal General on the status of the corruption and fraud cases in the DoD;
• Engagement with the DMV appeals board on its operational challenges;
• A briefing by the DoD on its second quarter expenditure performance;
• A briefing by the DMV on consequence management; and
• An oversight visit to Kimberley

Mr Mmutle asked the Committee whether the opportunity to do a site visit to the Lohatla base could be integrated into the programme.

Dr Wilhelm Janse van Rensburg, Researcher for Parliament’s two defence committees, noted that the Lohatla base was 200km away from Kimberley, so an extra day could be added to the visit so that the Committee could go to the Lohatla base as well.

Ms A Mthembu (ANC) moved the adoption of the programme, with amendments.

Ms P Phetlhe (ANC) seconded.

The meeting was adjourned.