ATC161021: Budgetary Review And Recommendations Report of the Portfolio Committee on Defence and Military Veterans on the 2015/16 Annual Report of the Castle Control Board (CCB) and Armscor, Dated 21 October 2016

Defence and Military Veterans

BUDGETARY REVIEW AND RECOMMENDATIONS REPORT OF THE PORTFOLIO COMMITTEE ON DEFENCE AND MILITARY VETERANS ON THE 2015/16 ANNUAL REPORT OF THE CASTLE CONTROL BOARD (CCB) AND ARMSCOR, DATED 21 OCTOBER 2016.

This Report consists of two parts, with Part A dealing with the Castle Control Board (CCB) and Part B dealing with the Armaments Corporation of South Africa (ARMSCOR)

 

The Portfolio Committee on Defence and Military Veterans (PCODMV), having considered the financial and service delivery performance of the Castle Control Board (CCB) and the Armaments Corporation of South Africa (ARMSCOR) for the 2015/16 financial year, reports as follows:

 

PART A: CASTLE CONTROL BOARD (CCB)

 

         1.         Introduction

 

1. Description of core functions of the Castle Control Board

 

The Castle Management Act, 1993 (No. 207 of 1993) provides for a Castle Control Board (CCB) to govern and manage the Castle – South Africa’s oldest architectural structure - on behalf of the Minister of Defence and Military Veterans. The National Heritage Resources Act (No. 25 of 1999) provides for the management of the Castle as a national heritage site. The Castle’s objectives are set out in the Castle Management Act as follows:

• To preserve and protect the military and cultural heritage of the Castle;
• To optimise the tourist potential of the Castle; and
• To maximise accessibility to the public.

 

1.2        Mandate of Committee

 

The Portfolio Committee on Defence and Military Veterans (PCODMV) is mandated to oversee the CCB to ensure that the entities fulfils its mandate through the monitoring of the implementation of legislation and adherence to policies, such as the Castle Management Act, 1993 (No. 207 of 1993), the National Heritage Resources Act (No. 25 of 1999), and the Defence Endowment Property and Account Act (No. 33 of 1922). It must scrutinise legislation which supports the mission statement of Government; the budget and functioning of the CCB.

1.3        Purpose of the BRR Report

 

Section 5 (2) of the Money Bills Procedures and Related Matters Amendment Act (Act 9 of 2009) allows for each Committee to compile a budgetary review and recommendation report (BRRR) which must be tabled in the National Assembly.  Section 5(3) provides for a budgetary review and recommendation report to contain the following:

 

a) an assessment of the department’s and entities’ service delivery performance given available         resources;

1. an assessment on the effectiveness and efficiency of departments use and forward allocation of available resource; and
2. recommendations on the forward use of resources

 

In October of each year, portfolio committees must compile a BRRR that assess service delivery performance given available resources; evaluate the effective and efficient use and forward allocation of resources; and may make recommendations on the forward use of resources. The BRRRs are also source documents for the Standing/Select Committees on Appropriations/Finance when they make recommendations to the Houses of Parliament on the Medium-Term Budget Policy Statement (MTBPS). The comprehensive review and analysis of the previous financial year’s performance, as well as performance to date, form part of this process.

 

1.4        Methodology in compiling the report

 

The Report is compiled from the various activities of the Committee. It is inclusive of the Committee’s meetings, oversight visits, reports on budget votes, strategic plans, annual performance plans and annual reports, as well as previously published Committee reports.

 

1.5        Dates of oversight visits

 

The PCODMV conducted one oversight visit to Gauteng over the period 21 to 24 July 2015 where it visited the Gerotek Testing Facilities of Armscor.

 

1.6        Information used to compile the Report

 

Besides the information on the Oversight visit, other information used in the assessment of the service delivery and financial performance included:

 

• Committee report on the 2015/16 budget hearings, strategic plans and annual report;
• The National Development Plan;
• The 2015 Estimates of National Expenditure;
• The 2015 State of the Nation Address by President Zuma; and
• The Auditor-General Report on the DOD.

 

1.7        Structure of the Report

 

This Report comprises seven sections:

 

• Section 1: Introduction – sets out the mandate of the Committee, the purpose of this
        report (BRRR) and the process to develop this report.

• Section 2: Provides an overview of the key relevant policy focus areas.
• Section 3: Provides an overview and summary of previous key financial and
        performance recommendations of Committee (2014/15).
• Section 4: Provides a broad overview and assessment of financial performance of the
        Department for 2015/16.
• Section 5: Overview of service delivery and performance. 
• Section 6: Key Committee findings. 
• Section 7: Key recommendations.

 

 

1. Overview of the key relevant policy focus areas

 

2.1        State of the Nation Address 2015

 

No mention was made in relations to the Castle but Operation Phakisa is aimed at unlocking opportunities in the shipping, fisheries, aquaculture, mining, oil and gas, bio-technology and tourism sectors. Related matters include the fact that the fight against corruption continues to be taken forward by the Anti-Corruption Inter-Ministerial Committee.  Government has in place seven anti-corruption institutions and seventeen pieces of legislation which are intended to combat corruption. This demonstrates a concerted effort by government to break the back of this scourge in the country. Cabinet has adopted vigorous and integrated interventions to combat the vicious rhino poaching in the country.

2.2        The National Development Plan

 

The NDP and its related policies provide a national framework that will inform the contribution by national departments and public entities. Aspects relevant to the CCB and our envisaged contribution are as follows:

 

• Tourism:  The Castle of Good Hope (CGH) as a premier heritage tourism destination is part of important debates and regularly engages with the tourism industry, government departments, donors and partners to contribute toward the NDP outcomes and targets. CCB Programme 3 deals with Tourism Management and the organisational objective aligned to the NDP is “To maximize the tourism potential of the CGH”.

 

• Envisaged Reduction in Youth Unemployment:  The CCB is running a programme for youth job shadowing and internship. This initiative will be strengthened and refined over the MTEF. In this regard the CCB is working with the Culture, Arts, Tourism, Hospitality & Sports Sector Education and Training Authority to access some of their resources. The CCB’s output objective in Program 4, which is aligned to the NDP, is “Delivering a range of public programmes with SA schools, cultural groups and special community groups”.

 

• Strengthening the National Research and Development Capacity:  The CCB is very mindful of the historical significance of the CGH and its collections. These offer significant opportunities in the areas of education and research. The organisation has a small resource centre which it plans to expand. The CCB will establish a CCB Strategic Research capability, particularly to record, monitor and share the lessons of the multi-million rand renovations project. The link with the NDP is CCB Programme 2 “Ensure the maintenance, preservation, interpretation and showcasing the history of the Castle”.

 

• Fraud and Corruption: The CCB will intensify its campaign in fighting fraud and corruption. CCB Programme 1 refers to “Ensure clean, sound administration and good governance”. The organisation is involved in a process to review its legislation and has strengthened most of its critical internal controls to ensure a sound, corruption and crime-free organisation.

 

2.3        The Medium Term Strategic Framework (2014 - 2019)

 

The MTSF Outcomes to which CCB will contribute by virtue of its legislative mandate and inherent capabilities are as follows:

 

MTSF Outcomes 4 and 5: “A skilled and capable workforce to support an inclusive growth path” and “Decent employment through inclusive economic growth” are linked to the CCB Program “To maximise the tourism potential of the CGH” with the following outcomes set out in the CCB Strategy Map:

 

• Deliver a complete offering of visitor services and experience;

• Human resource development and adequate staffing levels;

• Implement a revenue generation plan; and

• Responsible commercialisation drive.

MTSF Outcome 12: “An efficient, effective and development orientated public service and an empowered, fair and inclusive citizenship” is linked to CCB programmes 1 and 2, namely “Ensure clean, sound administration and good corporate governance“ and “Ensure the maintenance, preservation, interpretation and showcasing of the history of the Castle”. These are linked to the following Strategic Map outcomes:

 

• Effective and efficient systems of internal control;

• Sound financial control;

• Research and international benchmarking; and

• Integrated resource management.

 

2.4        Ministerial Priorities

 

The CCB shall endeavour to align its programmatic outputs and outcomes to these of the Ministry:

 

• Defence Strategic Direction. This priority relates to ensuring the provision of Ministerial strategic direction to the DOD over the short, medium- and long-term.

 

• Strategic Resourcing Direction. This priority relates to the directing of the developing of an appropriate Defence Funding Model thereby ensuring the adequate resourcing of the Defence function over multiple MTSF periods aligned with prevailing defence policy.

 

• Organisational Renewal Direction. This priority relates to the directing of the renewal of the defence organisation to achieve greater efficiencies and effectiveness across the defence functions.

 

• Human Resources (HR) Renewal Direction. This priority relates to the directing of the renewal of the departmental human resource function to ensure that the personnel profile is able to meet both current and future defence obligations.

 

• Capability Sustainment Direction. This priority relates to reviewing the Defence direction to the Defence Industry, technology development and directing Defence acquisition in line with the four milestones of the SA Defence Review 2015.

 

2.5.       Overview of CCB Strategic Plan and Annual Performance Plan

 

The CCB 2015/16 Annual Performance Plan and the Strategic Plan (2015 - 2020) give effect to the mandate of the CCB which translates into the following outcomes:

 

Programme 1: Ensure clean, sound administration and good corporate governance. Delivery of a significantly improved corporate governance environment as measured by the CCB’s annual AGSA audit rating i.e. achievement of a clean audit report.

 

Programme 2: Ensure the maintenance, preservation, interpretation and showcasing of the history of the Castle. Delivering of an increased number of innovative museum exhibitions and other displays accessible to the general public and tourists.

 

Programme 3: Maximise the tourist potential of the Castle. Delivering of the Castle as an enhanced tourist attraction as indicated by increased visitor figures and revenue generated through tourism activities.

 

Programme 4: Increased public profile and positive perception across all sectors of the community

 

          

         3.         Summary of previous key financial and performance        recommendations of the Committee

          

3.1        BRRR 2015 recommendations

 

In 2015, the Committee made the following recommendations in its BRR Report on performance and financial matters:

 

• During its presentation to the Committee, the CCB listed the national cultural events it hosted (Freedom Day, Heritage Day, International Mandela Day), and re-iterated that greater effort must be made to raise public awareness of the modern role of the Castle, as well as its historical significance. Greater effort should be made to ensure that particularly rural communities and military veterans from provinces other than the Western Cape, are included in the above-mentioned events.
• The Committee expresses its satisfaction that efforts made to improve the management and administration of the Castle have been successful, evident in the unqualified audit opinion of the Auditor-General of South Africa.  We urge the Castle Control Board to focus on resolving weaknesses identified in policy, the drafting of key performance indicators, the three year rolling audit plan, as well as the internal audit plan.
• Information presented to the Committee highlighted the particular renovations and maintenance work required to preserve the Castle. Care must be taken to ensure that such renovations do not negatively impact on the Castle’s normal operations, do not limit or disrupt visitation/tourism for too long a period, as well as the hosting of events. This would provide stability on the income or revenue raised with the abovementioned events.
• Related to the above, the Committee stresses that alternative sources of revenue should be sought, focused on increasing the revenue of the Castle as well as its commercialisation. This would also ensure that the Castle’s reserves are not depleted.  It is requested that the Castle presents to the Committee its Revenue Generation Strategy.
• Matters relating to the authority structure of the Castle should be addressed as soon as possible.

 

 

3.2        Response by the Minister of Finance:

 

No specific response was required from the Minister on the 2015 BRRR Recommendations.

 

3.3        Committee 2015/16 Budget Report

 

The Committee made the following recommendations in terms of the 2015/16 Annual Performance Plan and Strategic Plan (2015 - 2020):

 

• The Committee commends the Castle Control Board for the strides made in establishing the required internal controls and establishing systems that will ensure that the entity complies with national norms and standards. However, it recognises that greater creativity is required to ensure that the Castle further enhances its self-sufficiency in terms of funding.
• The Committee is concerned about vagrancy and crime around the Castle, the impact of renovations on daily operations, as well as the ability of the CCB to substantially increase its revenue to ensure its financial sustainability.

 

         4.         Overview and assessment of financial performance FOR 2015/16

          

4.1. Overview of Vote allocation and spending for 2015/16 FY

 

The budgetary allocation for the CCB is listed in Table 1 below.

 

Table 1: CCB Budgetary allocation 2015/16

Programme	Budget				Nominal Rand change	Real Rand change	Nominal % change	Real % change
R thousand	2014/15	2015/16	2016/17	2017/18	2014/15-2015/16		2014/15-2015/16
Programme 1: Administration	4 180.0	5 091.0	5 428.0	5 674.0	911.0	677.8	21.79 per cent	16.22 per cent
Programme 2: Conservation	1 863.0	1 950.0	2 020.0	2 121.0	87.0	-  2.3	4.67 per cent	-0.12 per cent
Programme 3: Tourism Promotion	75.0	130.0	150.0	158.0	55.0	49.0	73.33 per cent	65.39 per cent
Programme 3: Public Access	260.0	330.0	347.0	364.0	70.0	54.9	26.92 per cent	21.11 per cent
TOTAL	6 378.0	7 501.0	7 945.0	8 317.0	1 123.0	779.4	17.61 per cent	12.22 per cent

 

Programme 1: Administration

The aim of this programme is to ensure clean, sound administration and good corporate governance.

 

Programme 2: Maintenance and conservation of the Castle

The aim of this programme is to ensure the maintenance, preservation, interpretation and showcasing of the history of the Castle.

Programme 3: Tourism

The aim of this programme is to maximise the tourism potential of the Castle of Good Hope.  

Programme 4: Public Access

The aim of this programme is to achieve an increased public profile and positive perception across all sectors of the community.

 

 

 

 

 

 

 

 

 

4.1.1     Performance Information

There is a total of 13 targets indicated in the APP.

Table 2: Performance Information for 2015/16

Performance Indicator	Audited Performance	Actual Performance	Estimated Performance
	2013/14	2014/15	2015/16
Number of critical corporate governance measures	-	8	5
Percentage of adverse AG findings successfully resolved	-	100%	100%
CCB SP submitted to the Executive Authority	Baseline	1	100%
CCB AR submitted to the Executive Authority	Baseline	1	100%
Percentage completion of all approved, scheduled repair and maintenance	New indicator	100%	100%
Annual increase in the actual number of new, innovative heritage projects and programmes	New indicator	4	5
Percentage completion of all approved, scheduled logistics and movements during renovations	New indicator	100%	100%
Total number of tourists per annum	141 084	149 940	152 000
Total Gross Revenue per annum	R3.5m	R3.3 million	R3.9 million
Annual income from events and the hosting of film and fashion shoots	Was grouped with the ‘Total Gross Revenue per annum’.	R3.2 million	R3.5 million
Year-on-year increase in the number of people reached through positive media coverage as measured by independent monitoring systems	Baseline	5 million	10 million
Number of students interns successfully mentored by the CCB at the CGH	New indicator	20	25
Number of successful community, educational and heritage programmes	Baseline	10	12

 

4.2        Quarterly spending for 2015/16

 

The National Treasury does not include the entities in its quarterly analysis nor do the Committee review the performance of the entities on a quarterly basis.

 

4.3        Report of the Auditor General (AG)

 

The CCB received a clean audit opinion from the Auditor-General for the FY2015/16, as opposed to “Financially unqualified opinion with findings on PDO and compliance” for the previous two financial years. The A-G did not note any material findings under “Predetermined objectives”, especially on the usefulness and reliability of Programme 2, 3 and 4.  It also did not list any concern regarding “Compliance with legislation”, as well with their “Internal Controls.”

 

Irregular expenditure

An amount of R57 195.00 is listed as Irregular expenditure and the explanation provided refers to the non-compliance with Treasury Regulations for not obtaining three quotations and not stating the reasons for this. In the previous year this amount was R214 000, which has subsequently been condoned. The A-G recommends that “Control measures should be strengthened to ensure compliance with legislation.”

 

Unauthorised Expenditure and Fruitless and Wasteful Expenditure

There was no “Unauthorised Expenditure” for the FY 2015/16.  There was no “Fruitless and Wasteful Expenditure” for the FY2015/16 against R3 000 the previous financial year.

 

 

5.         OVERVIEW AND ASSESSMENT OF PERFORMANCE

 

Financial Performance for the 2015/16 Financial Year

The Table indicates overall an underspending of R75 000 for the FY 2015/16 against an overspending of R467 000 in the previous financial year.

Table 3: Budget for FY2015/16

Programme	2014/15 R’000 (R thousand)		2015/16 R’000 (R thousand)
	Budget	Actual expenditure	Budget	Actual Expenditure	Variance
Administration	4.182	5.172	5 091	5 658	(567)
Conservation	1.254	656	1 950	282	1 668
Tourism Promotion	75	60	130	10	120
Public Access	260	350	330	1 476	(1146)
Total	5 771	6 238	7 501	7 426	75

 

Table 4: Revenue FY 2015/16

Source of revenue	2014/15		2015/16
	Estimate	Amount collected	Estimate	Amount collected
	R’000
Sales	3 000	3 278	3 730	2 942
Rental income	2 171	743	3 156	1 277
Other income	164	292	15	41
Interest income	600	677	600	646
TOTAL	5 771	4 697	7 501	4 905

 

In terms of Revenue Collection, the Reports shows an increase of R208 000 where R4 697 000 was collected in 2014/15 and R4 905 000 was collected in 2015/16. Comparatively, revenue collected has increased but similarly as in the previous financial year, less revenue has been collected than planned. On the other hand, it is commendable that the expenditure has been kept in check as opposed to the previous year where the actual expenditure was more than what was budgeted for

Further, access to the CCB’s Treasury approved surplus funds significantly increased the capacity of the organisation to fulfil its constitutional and other mandates. It reported in its FY 2014/15 an accumulated surplus of R12.7 million (R13.9m in FY 2013/14), which this year has been reduced to R10.12 million

 

Non-financial performance

 

The Board has succeeded to either meet or exceed all 12 of the CCB’s key performance indicators:

 

• Programme 1: Administration

 

It met all four targets and exceeded the first one “Number of corporate measures in place” with 2, which is due to the tightening of the control environment. This programme includes the KPI of achieving a clean audit. This achievement was, however, undone through overspending by R567 000 in Programme 1.

 

• Programme 2: Maintenance and conservation of the Castle

All three targets were met and the second one – “Number of new, innovative heritage projects and programmes,” was exceeded. An underspending of R1 668 000 is recorded for this programme versus the planned budget (R1 950 000) for this programme.

• Programme 3: Tourism

The two targets were both exceeded namely the “Total number of tourists per annum” with 2 067 more tourists, and “Total gross tourism revenue per annum” by R301 798.  This was achieved with an underspending of R120 000 versus the planned budget (R130 000) for this programme.

• Programme 4: Public Access

The three targets were exceeded, with the first “Year on year increase of number of people reached through positive media” being exceeded by more than 97 million. The second, the  “Number of student interns” was exceeded by one, while the third the “Number of community, educational and heritage programmes,” was exceeded by three.  This was achieved with an overspending in the planned budget by R1 146 000

 

5.9        Oversight visit reports: Summary of key performance matters

 

The visit to Gerotek Testing Facilities of Armscor on 22 July 2016, was conducted to experience one of Armscor’s testing facilities. With other facilities such as Alkantpan, Armscor was encouraged to enhance the “sweating” of these assets especially since it allocation from the State is declining. The Committee also impressed on Armscor to enhance the involvement, training and skills development of the youth in such facilities as well as to improve its employment equity status.

 

6.         COMMITTEE KEY FINDINGS: CASTLE CONTROL BOARD

 

The following findings were made regarding the CCB:

 

• The Committee applauded the CCB for its clean audit opinion, a historic first.
• The irregular expenditure of R57 195 was noted by the Committee and the Board was encouraged to further enhance its efforts to eliminate this expenditure.
• The Committee noted that as oppose to last year’s annual report, the 2015/16 report does not have a list of the various risks and actions how to mitigate these.
• Questions were asked around the performance awards to the CEO and CFO, especially against the background that few other employees received any performance rewards.
• The CCB has a challenge to manage the whole prescient, as it does not have control over the entire Castle.
• The continuous reduction of the historic surplus to the amount of R10.2 million from a R13.9 million position three years ago, was noted as a concern by the Committee.
• The Committee raised concern about the “het Bakhuys” restaurant as it was raised previously with no apparent resolution to its migration to the CCB.
• The Committee noted that the Military tattoo was not budgeted for and wanted clarity on how the CCB will deal with it.

 

7.         COMMITTEE Recommendations

 

• The CCB was encouraged to further enhance its clean audit opinion by ensuring that the noted Irregular expenditure is avoided in future.
• The Committee agrees with the recommendation by the A-G regarding irregular expenditure that control measures should be strengthened to ensure compliance with legislation.
• The Committee recommended that the CCB should include the list with risks and the action plans to mitigate these, in their Annual Reports.
• The Committee recommended that performance rewards should be managed responsibly and that other staff members should also be considered for these rewards.
• The Committee indicated its concern about the dwindling reserves without a concomitant increase in revenue and recommended that the CCB share it Revenue Optimisation Strategy with the Committee as soon as possible.
• The Committee was especially concern about the increasing salary bill and indicated that the CCB should manage this situation prudently.
• The CCB indicated that the military tattoo is a legacy project but given the funding modality of it, it plans to end this historical arrangement.

 

 

 

 

PART B: ARMAMENTS CORPORATION OF SOUTH AFRICA (ARMSCOR)

          

         1.         Introduction

 

            Description of core functions of the entity

 

Armscor was established in terms of the Armaments Production and Development Act (No. 57 of 1968) to satisfy the requirements of the South African National Defence Force (SANDF) in respect of Defence Matériel. The Armscor Act (No. 51 of 2003) was enacted to provide for the continued existence of Armscor, and to provide for the functions, accountability and finances of the Corporation, as well as for matters connected therewith

 

1.2        Mandate of Committee

 

The Portfolio Committee on Defence and Military Veterans (PCODMV) is mandated to oversee Armscor to ensure that it fulfils its mandate through the monitoring of the implementation of legislation and adherence to policies, such as the Armaments Production and Development Act (No. 57 of 1968) and the Armscor Act (No. 51 of 2003).

 

1.3        Purpose of the BRR Report

 

Section 5 (2) of the Money Bills Procedures and Related Matters Amendment Act (No. 9 of 2009) allows for each Committee to compile a budgetary review and recommendation report (BRRR) which must be tabled in the National Assembly.  Section 5(3) provides for a budgetary review and recommendation report to contain the following:

 

• an assessment of the department’s service delivery performance given available  resources;
• an assessment on the effectiveness and efficiency of departments use and forward allocation of available resource; and
• recommendations on the forward use of resources

 

The above is done in October of each year, and the BRRR is also a source documents for the Standing/Select Committees on Appropriations/Finance when they make recommendations to the Houses of Parliament on the Medium-Term Budget Policy Statement (MTBPS). The comprehensive review and analysis of the previous financial year’s performance, as well as performance to date, form part of this process.

 

1.4        Methodology in compiling the report

 

The Report is compiled from the various activities of the Committee. It is inclusive of the Committee’s meetings, oversight visits, reports on budget votes, strategic plans, annual performance plans and annual reports, as well as previously published Committee reports.

 

1.5        Dates of oversight visits

 

The PCODMV conducted one oversight visit to Gauteng over the period 21 to 24 July 2015 which included a visit to Armscor’s Gerotek Testing Facilities.

 

 

 

 

1.6        Information used to compile the Report

 

Besides the information on the Oversight visit, other information used in the assessment of the service delivery and financial performance included the:

 

• Committee reports on the 2015/16 budget hearings, strategic plans and annual report;
• The National Development Plan;
• The 2015 Estimates of National Expenditure;
• The 2015 Budget Speech of the Minister of Finance;
• The 2015 State of the Nation address by President Zuma; and
• The Auditor-General Report on the DOD

 

 

 

 

 

 

1.7        Structure of the Report

 

This report comprises seven sections:

 

• Section 1: Introduction – sets out the mandate of the Committee, the purpose of this report (BRRR) and the process to develop this report.

• Section 2: Provides an overview of the key relevant policy focus areas.
• Section 3: Provides an overview and summary of previous key financial and performance recommendations of Committee (2015/16).
• Section 4: Provides a broad overview and assessment of financial performance of the Department for 2015/16.
• Section 5: Overview of service delivery and performance. 
• Section 6: Key Committee findings. 
• Section 7: Key recommendations.

 

2.         Overview of the key relevant policy focus areas

 

2.1        State of the Nation Address

 

The theme of the 2015 State of the Nation Address (SONA) was 20 years of a democratic Parliament. The focus area of the SONA which found most relevance to Armscor related to local Procurement. During the 2015 SONA, President Zuma stated that “government will set aside 30 per cent of appropriate categories of state procurement for purchasing from SMMEs, co-operatives as well as township and rural enterprises.” With regards to local procurement, it is crucial that both the SANDF and Armscor, which is responsible for the acquisition of defence materiel for the SANDF, adhere to this requirement.

2.2        National Development Plan (NDP)

The NDP identifies small, medium and micro enterprises as one of the key drivers of change for South Africa’s future. Armscor is closely linked to this aspect of the NDP, specifically through the Defence Industrial Participation policy. This policy was updated and implemented in line with the strategic objective to improve utilisation of offsets to support the NDP objectives and to develop Small Medium Micro Enterprises (SMME’s) and BEE suppliers.

Armscor further contributes to the NDP’s Chapter 3 (Economy and employment) through the employment of 1 383 full-time personnel and creating many more economic opportunities through its business endeavours with the South African defence industry. It also assist in terms of Chapter 9 of the NDP (Improving Education, Training and Innovation). In 2015/16, for example, Armscor awarded 55 bursaries to students, assisted with the Adult Education and Training Programme which reached at least 54 employees and other programmes such as the Armscor Management and Leadership Programme and the Training Development Programme.

 

2.3        Medium Term Strategic Framework (MTSF) 2014 - 2019

Armscor’s Strategic Priorities are aligned to several MTSF outcomes, including Outcomes 2, 3, 4, 5, 11 and 12. For 2015/16, however, Armscor contributed in particular to the following MTSF outcomes:

Outcome 4: Decent employment through inclusive economic growth. Armscor continued to employ 1 383 members during the year. It further contributed to economic growth through the management of 16 Defence Industrial Participation (DIP) initiatives. Finally, it managed to raise revenue to the value of R1.395 billion in 2015/16.

Outcome 5: A skilled and capable workforce to support an inclusive growth path. During its presentation on its 2015/16 Annual Report, the CEO of Armscor noted its highly skilled personnel as one of the most important assets of the entity. Armscor runs a highly successful Research and Development programme which includes, inter alia, the Gerotek test facilities, projects in Armour development, Protechnik Laboratories, Ergonomics technologies, Hazmat protective systems and the institute for Maritime Technology. Technology funding for 2015/16 totalled R590 million.

 

2.4        Strategic Priorities of Department

The Armscor Overarching Corporate Plan for 2014/15 to 2016/17 notes the following focus areas:

• Acquisition of defence materiel for the South African National Defence Force (SANDF) and contracting through-life support of in-service equipment.

 

• Provide an Armscor Dockyard which provides repair and maintenance services to the South African Navy and exploit opportunities for commercial capabilities.

 

• Providing research and development which provides research, development, test and evaluation support to acquisition and SANDF operational users.

2.5.       Overview of Armscor’s Corporate Plan for 2015/16

 

Armscor’s Corporate Plan for 2015/16 highlights the main focus areas to be in line with the 2014/15 to 2016/17 Strategic Report. It further notes that for the 2015/16 financial year, Armscor aimed at improving the following aspects:

 

• Customer satisfaction through service delivery standards.
• Accountability in the execution of the mandate.
• Financial responsibility and the responsible utilisation of scarce financial resources.
• Efficiency, effectiveness and economical service delivery.
• Utilisation of the human resources of Armscor to provide the services required, as divined in the relevant legislation.

 

Armscor further aimed to focus on the following strategic objectives in 2015/16:

• Acquisition excellence.
• Technology advancement
• Resourcing of Armscor’s Capabilities.
• Industry sustainability
• Stakeholder engagement

 

3.         Summary of previous recommendations of the Committee

 

3.1.       2015 BRRR Recommendations

 

In 2015, the PCODMV made the following recommendations in its BRR Report on performance of Armscor for the 2015/16 financial year:

 

• The Committee noted that some targets had been met after the end of the prescribed period, and the Committee urges the entity to avoid such a situation in future.
• The Committee urged Armscor to consider adjusting the target deadline to ensure higher levels of performance.
• The Committee urged Armscor that care must be taken to ensure that any changes to theDockyard’s management arrangements should not be to the detriment of the South African Navy who relies on this facility for all vessels’ maintenance and repair.
• The Committee urged Armscor to ensure the resolution of the single outstanding Defence Industrial Participation obligation by a certain company (MBDA) and related to the acquisition of the Exocet surface-to-surface missiles. The Corporation should insist on the fulfilment of these obligations as agreed or should explore alternative measures to enforce such obligations.
• In the light of reduced state funding, Armscor will be heavily reliant on its commercialisation strategies. In this sense, the turnaround strategy at Armscor is essential to ensure the future of the entity.

 

3.2        Response by Department and Minister of Finance:

 

The Minister of Finance’s response dated 17 May 2016 to the 2015 BRRR recommendations, refers only to the recommendations made on the Department of Defence. 

 

3.3.       Committee 2015/16 Budget Report

 

The Committee made the following recommendations in terms of the 2015/16 Corporate Plan and projected budget for 2015/16:

 

• Armscor’s projected negative financial position reported in its Corporate Plan and further elaborated on during its appearance before the Committee; and the impact this may have on not only SANDF requirements but the realisation of the role Armscor is set to play in relation to the implementation of the 2015 South African Defence Review, is cause for concern.
• The Committee noted with concern that Armscor’s Corporate Plan indicates that the loss of skilled personnel and expertise remains a challenge to the Corporation.
• The viability of the Dockyard remained a challenge, particularly in light of the loss of skilled personnel, the challenges relating to improving the facility’s profitability, as well the impact these may have on meeting the Navy’s requirements.
• The Committee welcomed the intention to review the Defence Industrial Participation (DIP) policy.
• The Committee welcomed the planned establishment of an intellectual property system (database), and the intention to exploit current intellectual property.

 

         4.         Overview and assessment of financial performance

 

4.1.       Overview of Armscor’s 2015/16 financial outlook

The net value of the Group increased from R1.995 billion in 2014/15 to R2.192 billion. The total comprehensive income of the Group also increased from R84.2 million in 2014/15 to R200.1 million in 2015/16. However, revenue over the year under review decreased from R1.525 billion in 2014/15 to R1.395 billion in 2015/16. This is largely due to:

• A R30 million reduction in the sale of goods and services
• A R54.6 million reduction in the allocation from the state budget
• A R8.6 million reduction in finance income
• A R41.4 million reduction in other income

The following additional financial matters should be noted:

• Total revenue declined by 7.6 per cent while expenditure increased by 13.1 per cent.
• A loss of R139.5 million is noted due to the settlement made to members of the Armscor Medical Benefit Fund.
• The total payment to the executive directors increased from R4.661 million in 2014/15 to R5.799 million in 2015/16.
• An amount of R1.668 million relating to unrecoverable debts was written off during the year.

Armscor had R13.2 million in irregular expenditure in 2015/16, which is lower than the R34.5 million in 2014/15. This relates to Armscor’s 25% black equity selection criterion as a requirement. However, as this selection criterion was deemed to be in conflict with the PPPFA, the total value of contracts was considered as irregular. Armscor has engaged with National Treasury on this matter. Fruitless and wasteful expenditure amounting to R823 was incurred as a result of the late payment of interest. This is similar to the R790 Fruitless and Wasteful expenditure in 2014/15.

 

 

 

4.2        Report of the Auditor General (AG) for 2015/16 and risk management

 

As was the case in 2014/15, Armscor received a clean audit with no qualifications from the Auditor General of South Africa for 2015/16.

In terms of risk management, the Audit and Risk Committee noted that it has regularly reported to the Board on its activities and made recommendations to the Board, management and Internal Audit as part of the execution of its oversight responsibilities. The Audit and Risk Committee is therefore satisfied, based on the information and explanations given by management, Internal Audit and the Auditor General that an adequate system of internal control is being maintained and it is subject to continuous improvement.

Furthermore, the finalised Corporate Risk Register remains in operation at Armscor. The Board approved a Compliance and Risk Policy which sets out the roles and responsibilities of Compliance and Risk as per the King III report. The Fraud Risk Management Policy promotes a zero tolerance approach to fraud and corruption. During 2015/16, compliance was achieved in respect of the above policies and the risk register.

 

5.         OVERVIEW AND ASSESSMENT OF PERFORMANCE

 

This section will provide an overview of achievements in the key focus areas of Armscor for 2015/16, its official performance against targets and human resources matters.

5.1        Achievements in the key focus areas

Acquisitions for the SANDF and other government departments reflect Armscor’s core function. During the 2015/16 financial year, Armscor achieved the following in terms of contract management:

• R5.631 billion in terms of contracts relating to maintenance and support (This is slightly less than the R6.58 billion managed in 2014/15).
• R6.315 billion in terms of capital equipment acquisition (This is higher than the R4.5 billion managed in 2014/15).

Armscor managed acquisition in terms of a number systems, of which the following should be noted:

• Maritime systems. A Hydrographic vessel is being purchased for the SA Navy. By June 2015, offers have been received and the Navy is in the process of reviewing its budget to determine affordability. Three Inshore- and three Offshore Patrol Vessels are also being acquired. Offers were received by September 2015, and the Navy is in the process of reviewing its budget to determine affordability. Armscor successfully assisted in the acquisition of two new Tug Boats for the SA Navy which has since been operationalised.
• Airborne systems. The communication and navigation equipment on the SA Air Force’s Oryx Helicopter fleet has been completed with 39 aircraft delivered to the Air Force. The A-Darter Air-to-Air missile has also been completed and an order has been placed for large-scale production. The first batch of missiles is expected to be delivered by the 3rd Quarter of 2016.
• Landward acquisitions. The most significant acquisition in the landward defence environment is Project Hoefyster which relates to the purchasing of new Infantry Fighting Vehicles for the SA Army to replace the ageing Ratel fleet which has been in service since 1976. The majority of the new fleet will be constructed in South Africa and a locally designed and manufactured turret is used. It is expected that the first batch of 45 vehicles will be delivered by June 2018. This takes into consideration a current nine month delay on the project.
• Communication systems. Significant progress was made in the completion of a new tactical communication system for the SANDF. Initial orders have been placed and the first units delivered.

Defence Industrial Participation (DIP) relates to the obligation of a foreign supplier to reciprocate defence related business in South Africa as a result of a Defence acquisition. No new DIP agreements were entered into during the period under review, while Armscor continues to manage 16 such agreements. The DIP Policy was revised in October 2015. One DIP agreement related to the 1999 Strategic Defence Procurement remains under the management of Armscor. This refers to an agreement with MBDA (A European based missile developer and manufacturer).

Armscor also manages the disposal of defence equipment such as vehicles, vessels, ammunition and other equipment for the DOD. During 2015/16, contracts for sales worth R41.2 million were placed.

The 2015/16 Annual Report indicates that both the Gerotek and Alkantpan test facilities as well as Hazmat protective systems continued in efforts to attract international investors and contributed the most to the Research and Development’s commercial income. During the year, 30.5 per cent of the total operating budget of R457 million was achieved through commercial means. For the Alkantpan test range, 64 per cent of its sales came from commercial streams. Concerns are raised, however, regarding the future of Alkantpan as it falls within the Square Kilometre Array (SKA) project’s radio frequency bounds which may affect future operations.

The Armscor Dockyard serves as the primary maintenance supplier to the SA Navy. As was noted in a number of previous years, the 2015/16 financial year was marred by several major concerns, including:

• A lack of funding. The funding gap results in the baseline support capability not being achieved.
• A lack of capacity. Manpower levels are well below the minimum capability levels required.

Based on these challenges, the Minister of Defence took a decision to change the management of the Dockyard. Subsequently, she called for a “harmonious approach” to management comprising Armscor, Denel and the SA Navy. In this arrangement (as approved by the Council on Defence), Armscor will become the contracting agent, Denel will manage and operate the Dockyard and the SA Navy will have sovereign control of the Dockyard. In 2015/16, repair and maintenance were done on a number of SA Navy vessels, including submarines, frigates, tug boats and patrol vessels. The Armscor Annual Report notes that the Dockyard achieved 97.35 per cent in ensuring milestone planned dates as approved in the project plan against a target of 90 per cent.

 

5.2        Performance against set targets

Armscor’s Three-year Corporate Plan includes two groups of performance indicators. The first of these groups relate to performance against Armscor’s functions as defined by the Service Level Agreement (SLA) with the Department of Defence and Military Veterans (DODMV). The second group measures performance against the set strategic objectives of the group. A total of 43 Key Performance Indicators (goals) were set for 2015/16. Armscor managed to achieve 36 of these, which is a success rate of 83.7 per cent. Targets not achieved are reflected in Table 1.

Table 1: Key Performance Indicators not achieved during 2014/15

Objective	KPI	Goal	Achieved	Performance against goal
Objective 3: Resourcing of Armscor Capabilities	Establish a Service Level Agreement with the SAPS	31 March 2016	-	A draft SLA was supplied but not finalised.
Objective 3: Resourcing of Armscor Capabilities	Establish a Service Level Agreement with Correctional Services	31 March 2016	-	Not achieved
Objective 3: Resourcing of Armscor Capabilities	Increase revenue from other departments (e.g. SAPS and Correctional Services to reduce the budget deficit	Conclude service agreement allowing charging of fees	No income generated	SLAs not finalised and no income generated from other departments.
Objective 3: Resourcing of Armscor Capabilities	Establish implementation plan for the Dockyard Modernisation Study	13 December 2015	-	This initiative was not taken further due to the changes in management of the Dockyard prompted by Ministerial intervention.
Objective 3: Resourcing of Armscor Capabilities	Implement HR, Payroll and Budget Modules	31 March 2016	-	Tender process and contracting took longer than expected.
Objective 3: Resourcing of Armscor Capabilities	Implement data leakage prevention solution	31 March 2016	-	Objective only partially achieved
Objective 4: Industry sustainability	Increase the percentage of local industry spend in respect of the Special Defence Account and General Defence Account managed by Armscor	2 per cent improvement	-6.6 per cent	Actual local spending represents 79 per cent of total spending in 2015/16 compared to 85.59 in 2014/16.

 

5.3        Personnel information

 

The 2015/16 Annual Report indicates that Armscor, including the Armscor Dockyard, has a staff complement of 1 383, which is lower than the 2014/15 figure of 1 437. In terms of representation, a target was set to increase black employees from 64 to 66 per cent and performance of 75 per cent was achieved. Female employees now comprise 34 per cent of Armscor.

 

In order to address skills shortage, Armscor continues to provide skills development through a number of programmes, the following of which are noteworthy:

 

• Armscor management and leadership programmes: 42 students completed training in 2015/16
• International Training Programmes. Five Armscor employees are studying at the Naval Post Graduate School in the USA in engineering, combat systems and cyber security.
• Talent Development Programme. A total of 30 candidates were included in this graduate training programme. This is a welcome improvement from the 20 candidates included in 2014/15.
• Bursaries. 55 Bursaries were made available to undergraduate students at various universities.
• SA Navy training. The Dockyard provided technical training to 31 SA Navy electrical engineer students and two mechanical engineer students.
• Apprenticeships. Through a MOU with the Department of Economic Development and Tourism, the Dockyard trained 77 apprentices in 2015/16. Of these, 44 were Armscor apprentices and 33 formed part of the Departmental contingent.

 

6.         COMMITTEE KEY FINDINGS: ARMSCOR

 

During its engagement with Armscor, the PCODMV made the following key findings:

• Armscor’s efforts to include the youth in its activities and through marketing is effective, but should be expanded. The Committee welcomes the fact that during 2015/16, Armscor hosted up to 7 000 youth at the African Aerospace and Defence (AAD) event and tended to youth development through visiting schools in four provinces and engaging with the Talent Pool Development programme.

 

• The reduction in revenue from R1.525 billion in 2014/15 to R1.395 billion in 2015/16 is a major point of concern and may impact negatively on the future viability of the entity. This highlights the need for Armscor the find ways of increasing revenue collection. The Committee was informed that Armscor is exploring such options, including the possibility to assist the DOD with the sweating of assets in its efforts to raise capital for the implementation of the Defence Review. Furthermore, it considers the commercialisation of Armscor assets, such as its Human Resources, and leasing them out to other African countries and local industries who can utilise their expertise.

 

• The situation at Alkantpan and its coexistence with the Square Kilometre Array project is a matter that requires urgent attention as it may jeopardise the future operational capacity of the institution.

 

• The Committee notes that Armscor has been tasked to facilitate an 18 month lease for a medium-distance plane.

 

• Armscor aims to create equal employment opportunities for people with disabilities and has set itself a target of 19 employees. Currently, it has only filled 17 such positions and room for improvement therefore exist.

 

• The Committee notes with appreciation the transfer of the Dockyard to the SA Navy in conjunction with Armscor and Denel. Being aware that suspensive conditions still apply to the arrangement, the Committee expects this arrangement to optimise service delivery to the SA Navy and the unlocking of commercial opportunities at the Dockyard. The Committee is further aware of the fact that the Dockyard needs roughly R750m in funds to rejuvenate its capacity and that Denel has gone out on an open tender with some BRICS countries to raise these funds.

 

• Concern was raised regarding the outstanding DIP agreement with the MBDA. A recent programme related to maintaining the missiles for the SA Navy was identified as a possible offset for the agreement. However, due to funding problems, current plans could not be executed. As such, a final agreement for offsetting the DIP agreement is still expected.

 

• The Committee notes the delays in the acquisition of the SA Navy’s hydrographic vessel as well as the Inshore- and Offshore Patrol Vessels under Projects Hotel and Biro respectively. These delays can be ascribed to funding constraints.

 

7.         COMMITTEE Recommendations

 

The PCODMV makes the following recommendations with regards to Armscor:

• That the coexistence agreement with the Square Kilometre Array project be finalised as soon as possible and that the Committee be informed in writing when the final agreement has been signed.
   
• For the duration of the official transition period, Armscor (in conjunction with the SA Navy) should provide the PCODMV with written quarterly updates on the status of the Dockyard. This information should include details on whether suspensive conditions were met in that quarter; employee figures at the Dockyard; a synopsis of the financial status of the dockyard; compliance to deadlines for vessel repairs and other services to the SA Navy; the number of artisans and other students under training at the Dockyard; and, commercial opportunities explored and unlocked at the dockyard. Progress with regards to the raising of capital for the Dockyard should also be reported.

 

• The Committee urges Armscor to increase its revenue collection streams as a matter of urgency. Future Annual Reports should include details on the capitalisation of Intellectual Property and outline other avenues explored for commercialisation. Simultaneously the Committee should also be provided with a long-term sustainability plan from Armscor.

 

• Armscor should aim to reach its set target for the employment of people with disabilities before the end of the 2016/17 financial year.

 

• Although outside the control of Armscor, the Committee notes with concern the delays in the acquisition of new vessels for the SA Navy under Projects Hotel and Biro. The Committee urges Armscor to expedite the acquisition of these vessels once the procurement process returns to the ambit of Armscor. Armscor should inform the PCODMV, at the resumption of the contracting for these vessels, what plans have been put in place to expedite the delivery of the vessels under these projects. Detailed timelines and cost-breakdowns for the two projects should also be provided to the Committee within 30 days of the official awarding of the respective tenders.

 

Report to be considered.