ATC200716: Report of the Portfolio Committee on Defence and Military Veterans on the 2020 Special Adjustments Budget for Vote 23 Defence Dated 15 July 2020

Defence and Military Veterans

REPORT OF THE PORTFOLIO COMMITTEE ON DEFENCE AND MILITARY VETERANS ON THE 2020 SPECIAL ADJUSTMENTS BUDGET FOR VOTE 23 DEFENCE DATED 15 JULY 2020

 

The Portfolio Committee on Defence and Military Veterans (PCODMV), having considered the Special Adjustments Budget of Vote 23: Defence and its entities, namely the Castle Control Board (CCB) and the Armaments Corporation of South Africa (Armscor),on 8 July 2020, reports as follows:

 

1. INTRODUCTION

 

1.1     Aim of the Special Adjustments Budget

 

National Treasury indicates on 24 June 2020 that the Special Adjustments Budget’s (Supplementary Budget Review) aim as follows:

 

“This special adjustments budget sets out government’s initial economic and fiscal response to COVID-19. It fast-tracks normal processes to provide resources to frontline services, provincial and local government, and firms and households, with a focus on the most vulnerable South Africans. It also underlines our commitment to stabilise the public finances and enact reforms that will promote trade, investment and job creation. This document is a bridge to the October 2020 Medium Term Budget Policy Statement, which will set out Cabinet’s proposals to strengthen the public finances and to accelerate economic growth in the context of a changed global economy.

 

This budget will be distinct from the normal adjustment budget, usually introduced in October, due to its nature and timing.

 

1.2     Process

 

The Portfolio Committee considered the Special Adjustments Budget of Vote 23 on 8 July 2020 by engaging the Department of Defence (DOD), the Castle Control Board (CCB) and Armscor. The DOD and two entities presented the adjustments of their respective budgets, after which the Committee engaged them on their presentations. The Committee made several observations that led to recommendations to the DOD and the two entities to address the impact of the special adjustments budgets on their annual targets and performance. This Report is divided into two sections, with Part A dealing with the DOD and Part B with the two defence entities.

 

PART A: DEPARTMENT OF DEFENCE

 

1. IMPLICATIONS OF THE COVID-19 PANDEMIC ON THE MANDATE OF THE DEPARTMENT

 

As part of the special adjustments budget, the work of the security forces during the lockdown period was taken into account. As such, National Treasury noted the following broad outline in terms of peace and security:

 

This function is performing essential services relating to the COVID-19 response. It has reprioritised R3.3 billion to support these interventions, primarily in the departments of Police and Defence. Additional funding of R6.7 billion is provided to support the COVID-19 response and increased deployment of the police service and national defence force during the lockdown. These funds are provided mainly for the procurement of personal protective equipment, and operational costs associated with roadblocks and air support.

 

The DOD is one of only a handful of departments that received an increased allocation specifically for its functions as part of the Covid-19 response. This should be seen in the context of the special allocation for defence and police services.

 

2.        ANALYSIS OF THE REVISED BUDGET ON EACH PROGRAMME

 

2.1     Broad budgetary adjustments

 

The DOD received an increased net allocation of R2.880 billion during the special adjustments budget. The main appropriation of R52.439 billion for 2020/21 therefore increases to R55.319 billion.

 

Of concern is that the increase noted in the special adjustments budget does not align with the costs associated with the South African National Defence Force’s (SANDF) deployment in the letter of deployment from the President submitted to Parliament. The letter, dated 21 April 2020, states that the expenditure expected to be incurred for the employment of members of the SANDF is R4.590 billion. While the DOD did receive a special Covid-19 allocation of R4.092 billion (see below), it was also subjected to the suspension of funds due to Covid-19 to the value of R1.212 billion. This is in line with a suspension of funds of most departments. As such, the net increase for the DOD is R2.880 billion. Nonetheless, the costs associated with the actual deployment are higher. Therefore, the DOD will also have to adjust its spending and planning patterns to align with the new budgetary requirements.

 

Table 1: DOD Special Adjustments Budget 2020

Programme R million	Main Budget 2020/21	Suspension of funds (Covid-19 purposes)	Allocated to (Covid-19 purposes)	Total net change	Total allocation
Programme 1: Administration	5 731.9	-193.5	30.0	-163.5	5 568.4
Programme 2: Force employment	3 671.1	-112.1	875.5	763.4	4 434.5
Programme 3: Landward Defence	17 421.9	-174.0	174.0	0	17 421,9
Programme 4: Air Defence	7 405.3	-91.0	330.0	239.0	7 644.3
Programme 5: Maritime Defence	4 915.6	-104.7	104.7	0	4 915,6
Programme 5: Military Health Support	5 656.0	-22.8	682.8	660.0	6 316.0
Programme 7: Defence Intelligence	1 187.5	-6.2	6.2	0	1 187,5
Programme 8: General Support	6 449.3	-507.7	1 888.8	1 381.1	7 830.4
TOTAL	52 438.6	-1 212.0	4 092.0	2 880.0	55318.6

 

National Treasury stated that the increased allocation is largely for protective equipment and operational costs associated with roadblocks and air support. This approach is reflected in the programmes that receive extra funding, as follows:

• Programme 2: Force employment R763.4 million additional allocation (net)
• Programme 4: Air Defence R239.0 million additional allocation (net)
• Programme 5: Military Health Support R660.0 million additional allocation (net)
• Programme 8: General Support R1.381 billion additional allocation (net)

 

2.2     Adjustment per economic classification

 

When the special adjustments budget is viewed in terms of economic classifications, the following should be considered:

 

• Compensation of employees. An additional R763.4 million is allocated to the DOD for compensation of employees. However, this increase should be seen in the context of the ongoing negotiations around compensation of employees between National Treasury and the DOD. In the 2020 Estimates of National Expenditure, National Treasury noted that “in its efforts to remain within the expenditure ceiling for compensation of employees…the DOD will review the composition of its personnel and military capabilities in its aim to strike a balance between its regular force, reserve force and civilian components that can contain costs while executing its ordered commitments…” National Treasury further states in the special adjustments budget that the R763.4 million for compensation of employees is for the Reserve Force deployment, including deployment allowances within the Force Employment Programme. As such, the additional allocation is unlikely to assist the DOD to remain within the compensation of employees ceiling. This was confirmed by the DOD during its engagement with the PCODMV, noting that the shortfall on Compensation of Employees for 2020/21 is expected to be R3 billion.

 

• Good and services. A total of R2.098 billion was allocated to Goods and Services for the Covid-19 response. However, there was also a suspension of funds for Goods and Services to the value of R1.092 billion. This suspension is for activities such as advertising and training activities. As such, the net increase for Goods and Services is R1.146 billion.

 

• Public corporations and private enterprises. The adjustments budget reveals a downwards revision of R120 million towards the transfer to Armscor. This may have a significant impact on the financial sustainability of Armscor. Furthermore, an additional R3 million is allocated to the Castle Control Board for the loss of income during restrictions on economic activity.

 

• Machinery and Equipment. A net increase of R1.077 billion towards machinery and equipment is reflected in the special adjustments budget. This will largely be used to procure disinfectant tunnels, set up quarantine clinics, procure personal protective equipment for deployed soldiers and to repatriate South African citizens.

 

 

 

2.3     Additional comments by the Department of Defence

 

In addition to the observations around the adjustments to the DOD budget based on information by National Treasury, the Department also presented a number of additional factors that the PCODMV considered during its engagement on 8 July 2020. This includes the following aspects:

 

• The overall requirement of Covid-19 Goods and Services is R3.6 billion. As such, given the current allocation, there is an existing shortfall of R1.5 billion.
• The allocation includes the following specific expenditure costs that were budgeted for:
  • R13.888 million for repatriation flights from China
  • R14.194 million for quarantine costs
  • R222.579 million for the deployment of the Reserve Force
  • R416.928 million for air support operations
  • R1.205 billion for Protective Equipment
  • R864 million for quarantine clinics
  • R249 million for field hospitals
  • R352.450 million for medical equipment
  • R148.8 million for vehicles, including ambulances

 

During the presentation, the DOD noted that while expenditure estimates were R4.5 billion, the allocation made was for R2.88 billion. By the time of reporting, financial authorities were issued for R1.327 billion of which R570.5 million has been paid.

 

2.4     How will the revised budget impact on the recommendations made during the Budget Votes?

 

The Committee made the following recommendations in its June 2020 Budget Report that may be impacted by the revised Special Adjustments Budget:

 

• The Committee urged the DOD to ensure that all SANDF personnel deployed to assist other state departments in the fight against Covid-19 be well prepared and issued with the relevant protective gear. The DOD is further urged to ensure that regular screening and testing of its members occur to prevent the spread of Covid-19 pandemic within the Armed Forces itself.

The prerequisite set in this recommendation still remains relevant, but it may be impacted by the fact that less funding than required were provided to the DOD for its Covid-19 deployments.

 

• The DOD should include, in its Annual Report, a list of areas in which it assisted other government departments, what the expenditure was in this regard and whether reimbursement for such assistance was received.

As part of its Covid-19 response, the DOD assisted various other departments and this recommendation has gained further significance.

 

• The Committee undertook to continuously engage the DOD on progress regarding Projects Hoefyster, Biro and Hotel.

Given the current fiscal constraints, pressure on funding these projects will remain high.

 

• The Committee also encouraged the Department to fast-track the sweating of assets to ensure maximum benefit for the SANDF. In this regard, the DOD should share with the Committee its detailed plans, once completed, for the sweating of assets.

Sweating of assets can offer an opportunity to assist in the current difficult fiscal position, but the current economic outlook may also limit the scale of returns of the sweating of assets.

 

• The Committee once again urged the DOD to engage National Treasury to find ways to avoid the irregular expenditure on Compensation of Employees, against the background of the rejuvenation plan that the DOD is expected to share with National Treasury. The Department should report on progress in this regard on a quarterly basis

The Special Adjustments Budget reveal that no real progress has been made on this matter. While National Treasury allocated an additional R720 million for Compensation of Employees, the shortfall on this item is still expected to be R3 billion.

 

3.       COMMITTEE OBSERVATIONS

 

During deliberations with the DOD, Members of the PCODMV made several observations related to Special Adjustments Budget and the following were noted:

 

• Members expressed concern about the lack of senior accounting officers’ presence in the meeting.
• The Committee required clarity on the amounts the DOD received to fight Covid-19, as an amount of R4.5 billion was proposed but the DOD only reported on R2.88 billion. While it was explained that they applied for R4.5 billion, National Treasury revised it downwards with the net increase for the DOD being R2.88 billion.
• Members wanted a specific breakdown of the various budgetary items, as several were identified at an earlier meeting, but the reporting did not cover all these items. The Committee emphasised the need for a proper Business Plan with objectives, targets, timelines and funding from the DOD in order to allow the Committee to measure the Department against specific deliverables and timelines.
• Questions were also asked around the purchases of protective gear and other equipment from China, given that some of the products can be sourced locally. The response was that the majority of goods are procured locally, and that only ventilators were purchased and fetched from China.
• Members noted the fact that an addition al R1.5 billion was required for the extension of the SANDF Covid-19 deployment, as per the latest presidential letter submitted to Parliament. However, it was noted that this funding requirement does not form part of the consideration of the Special Adjustments Budget that was tabled on 24 June 2020.
• The Committee inquired about the costs of repatriation flights from China and the DOD responded that they are in the process of claiming these costs from the Department of International Relations and Cooperation.

 

4.       COMMITTEE RECOMMENDATIONS

 

Based on its engagement with the DOD, the Committee made the following recommendations in relation to the Special Adjustments Budget:

 

• The Committee informed the leader of the delegation, Dr Gamede, to relay the Committee’s extreme discomfort with the absence of especially the Secretary for Defence and CFO as well as the Chief SANDF, at a crucial meeting to discuss the finances of the Department/SANDF to fight the pandemic.
• The DOD is required to submit a detailed written plan to the Committee on its planning and expenditure in relation to its Covid-19 deployment. The plan should include payments made thus far, objectives achieved, objectives still to be achieved, and payments still to be made. The document to be submitted should provide a similar breakdown of envisaged objectives and planned payments for the extension of the SANDF’s Covid-19 deployment. The report should be submitted to the Committee no later than 30 July 2020.
• The Committee requests a spreadsheet for all Covid-19 procurement projects to ensure that these are in line with procurement practices and broader empowerment efforts, specifically women, youth and historically disadvantaged individuals. In addition, a similar spreadsheet should be provided in the Annual Report for the broader procurement throughout the financial year. The spreadsheets should be provided to the Committee along with the DOD’s reporting on the 2019/20 Annual Report.
• The Committee welcomes plans to recover funds for repatriation flights from the Department of International Relations and Cooperation. The DOD should indicate, at future engagements with the Committee, progress made in the recovery of these funds.
• The Committee welcomed the important supporting role that the SANDF is played during South Africa’s efforts to curb the spread of Covid-19. The Committee further encourages the accounting officers of the DOD to ensure that planning remains in line with set objectives, cognisant of current fiscal constraints.
• Fiscal discipline in the Department will be of the utmost importance going forward. The DOD is encouraged to implement a zero-based budgeting approach within the Medium-term Expenditure Framework.
• The DoD is advised to ensure that its Procurement processes advance the transformation agenda through empowering women, the youth and historically disadvantaged individuals. The Department is further requested to provide the Committee with relevant details on progress on this regard at the quarterly and annual report engagements with the Committee."

 

PART B: DEFENCE ENTITIES - CASTLE CONTROL BOARD AND ARMSCOR

 

CASTLE CONTROL BOARD

 

1. IMPLICATIONS OF THE COVID-19 PANDEMIC ON THE MANDATE OF THE CCB

 

The CCB is a defence entity that is self-sustaining and derives its revenue mainly from visitors to the Castle of Good Hope and hosting events, functions and film shoots. Due to the lockdown regulations, the Castle was closed for visitors and other activities resulting in a loss of revenue to sustain itself. The entity therefore approached the DOD for a R3 million relief package to pay its employees and execute essential maintenance and repairs activities.

 

The CCB during its presentation emphasised the following to the Portfolio Committee:

 

• They made a submission to the DOD for a R1.6 million relief support package and this was based on an August 2020 return which turned out to be unrealistic and the amount was changed to R3million.
• On 20 May, the DOD transferred the R3million relief funding to the CCB and their UIF application was also successful and R57 565 paid over on 28 May 2020. After a management meeting, the UIF funds were returned on 11 June 2020, and salaries returned to normal as from 30 June 2020.
• The CCB’s Annual Performance Plan and Budget has been submitted to Treasury and it makes provision for an “Operational Subsidy” but with the severe budget cuts and reallocations their chances are slim.
• The CCB has reprioritised the 2020/21 budget, downscaling it from the original R8.9million to R4.6million.
• They believe that sustainability will be a challenge unless we see a swift turnaround in the tourism and events sector.

 

1. ANALYSIS OF THE REVISED BUDGET

 

1. (abridged version)

 

Table 2: Account descriptions

Account description	Reworked budget 2020/21	October / December start	April	May	June	Total expenditure to date	Projections December 2020
Consultants	145 000,00	200 000,00	-	78 780,86	29 095,00	107 875,86	30 000,00
External Audit Fees	450 000,00	410 000,00
Bank charges	120 000,00	60 000,00	2 357,70	3 125,20	1 897,30	7 380,20	44 280,00
Salaries and wages	3 600 000,00	2 100 000,00	296 127,00	294 613,00	296 127,00	886 867,00	1 776 762,00
IT requirements	84 000,00	65 000,00	-	4 136,05	20 095,59	24 231,64	6 191,10
Functions and events	25 000,00	-
Legal fees/levies	60 000,00	60 000,00		33 022,96		33 022,96

 

 

2.2     Utilisation of R3 million relief fund(abridged version)

Table 3: Fund utilisation

Account description	Reworked budget 2020/21	October / December start	April	May	June	Total expenditure to date	Projections - December 2020
Telecommunications	76 000,00	20 000,00	1 931,86	1 842,30	2 081,86	5 856,02	5 520,90
Cleaning & security	105 000,00	55 000,00	1 595,50	1 595,50	2 716,40	5 907,40	29 573,00
Repairs &maintenance	24 231,70	10 000,00	-	-	-		2 000,00
Other expenses	175 000,00	30 000,00	1 941,72	1 941,72	1 941,72	5 825,16	11 650,32
	5 165 231,70	3 050 000,00	303 953,78	419 057,59	353 954,87	1 076 966,24	1 905 977,32
						3 000 000,00	1 923 033,76
						1 923 033,76	17 056,44

 

Based on the projected spending, the CCB requested the PCODMV to take note of the following:

 

• The CCB’s update on the utilisation of the R3 million relief funding from the DOD;
• The CCB’s lock-down programmes and activities and gradual opening plans; and
• The CCB’s measures to deal with its Going Concern Status post-COVID19.

 

2.3     How will the revised budget impact on the recommendations made during the Budget Votes?

 

The Committee made the following recommendations in its June 2020 Budget Report that may be impacted by the revised Special Adjustments Budget of the CCB:

 

• The Committee took note of the CCB’s view that it is currently a situation “Business Extraordinary-Unusual!” because of the Covid-19 pandemic and even went so far as to state that it has become a “matter of life and death.” The Committee therefore asked the CCB to explain some of the measures it has taken to take the CCB forward.

As explained above, the CCB is gradually returning to normal and with the R3 million relief package should be able to operate until December 2020, when it is expected to be fully operational.

 

• Members enquired around the assistance that the CCB is giving to qualifying employees to access the Unemployment Insurance Fund (UIF).

This has been done successfully but returned when the R3 million relief package was received.

 

• The Committee enquired about the plans of the CCB if National Treasury does not approve the R1.6 million funding that the CCB has applied for. The Committee also expressed concern whether this amount will be sufficient should the Covid-19 pandemic impact on operations over a longer period.

The R3 million relief package has been received and address this concern.

 

• Members enquired around the ‘Going concern’ status of the CCB given that the entity was struggling with this issue before the advent of the Covid-19 pandemic.

The revised Annual Performance Plan and Strategic Plan will incorporate the measures to address the going concern challenges.

 

1.  

 

During deliberations with the CCB, Members of the PCODMV made the following observations related to the Special Adjustments Budget:

 

• The Committee noted the gradual return to normality for the Castle of Good Hope due to the pandemic and especially the lack of visitors, and requested to CCB to adjust their planning accordingly to outline the enforced changes.
• The Committee welcomed the R3 million relief funding that was made available to the CCB by the DOD, given that the entity did not operate to sustain itself and its staff. It was especially encouraged that the CCB has prioritised its employees and were willing to make scarifies to ensure the sustainability of the CCB.
• The CCB’s Going concern was again noted as a challenge and the Committee wants it to address this challenge going forward.

 

4. COMMITTEE RECOMMENDATIONS

 

• The CCB should present its revised Annual Performance Plan and Strategic Plan to accommodate the revised budget and targets to the Committee at their next engagement with the Committee.
• The Committee encouraged the CCB to continue to take care of its employees as it gradually opens to business and that it will hopefully be able to be fully operational in December 2020.
• The Committee recommended that the CCB emphasises, in it revised Annual Performance Plan and Strategic Plan, how it will address the Going Concern challenges.
• The CCB and Castle management are encouraged to implement a zero-based budgeting approach within the Medium-term Expenditure Framework.

 

 

ARMSCOR

 

1. IMPLICATIONS OF THE COVID-19 PANDEMIC ON THE MANDATE OF THE ARMSCOR

 

While the Armaments Corporation of South Africa (Armscor) does generate its own income, it still remains largely reliant on a state allocation. This allocation comes in the form of a transfer from the Department of Defence. As part of cost cutting measures across departments in response to the economic impact of the Covid-19 pandemic, the transfer from the DOD to Armscor has been decreased by approximately R120 million. The original financial planning was set on a transfer of R1.241 billion to Armscor. This has since been reduced to R1.136 billion.

 

The Armscor during its presentation pointed out the following projected reductions in its funding:

 

• Transfer payment reduction:    R120 million
• Income from sales reduction:  R86.9 million
• Finance income reduction:       R37.8 million
• Other income reduction:          R15 million

 

1. THE REVISED BUDGETARY OUTLOOK PER DIVISION

 

Based on the revised income projections, the financial position of the various Armscor divisions will also be negatively affected. While the Armscor Group originally projected a net surplus of R700 000 for 2020/21, a reduction in funding, sales and other income will likely see this reduced to a deficit of R243.3 million. The altered financial position of the Armscor Divisions are as follows:

 

• Armscor Corporate (including Acquisition) moves from a projected surplus of R2.4 million to a projected deficit of R141.8 million.
• Armscor Research and Development will increase its deficit from a projected deficit of R1.9 million to R92.7 million.
• The Armscor Dockyard moves from a projected surplus of R0.3 million to a projected deficit of R8.9 million.

 

Armscor further noted that is taking the following steps to limit the shortfall in funding:

 

• No salary increases for 2020/21, which is likely to save R48 million.
• No performance remunerations for 2020/21, which is likely to save R41 million.
• The reduction of operating costs by 5%, which is likely to save R17 million.
• Voluntary severance packages.
• Retrenchments if the transfer payment is reduced in following years.

 

It was stressed that these are proposals that still have to be approved by the Armscor Board.

 

1.  

 

Furthermore, Armscor indicated the impact of Covid-19 on service delivery targets, including the following:

 

• Impact on Service Level Agreement targets relating to acquisition contracting and programme execution – suppliers impacted by lockdown period and import restrictions.
• Strategic objectives, for example the renewal of applications systems that is critical for organisation efficiency is delayed.
• Capital renewal programme on main building complex is delayed.
• Financial objectives are all negatively influenced. The impact on future financial periods is concerning as the Group is supplementing the current budget with interest earned.

 

Finally, Armscor expressed significant concern around its future financial status, specifically given the decreasing number of projects managed by the Group. This relates directly to the reduction in funding of the Special Defence Account (SDA). The number of projects have decreased significantly in recent years (as noted in the Graph below). Of further concern is the lack of projects in outlying years.

 

Graph 1: Armscor projects per year

 

In relation to the risk noted above, Armscor highlighted serious project financial risks, including key defence acquisition projects currently underway. Armscor noted that:

 

• The Capital budget allocation from National Treasury has been reduced to zero from the 2021/22 financial year onward.
• A number of capital acquisition projects has been contracted with contracts that have contractual obligations during the period where there is no longer funding available on the Strategic Capital Acquisition Master Plan (SCAMP).
• Significant projects that will have a contractual obligation, but with no funding on the SCAMP during 201/22 onwards:
  • Project Hoefyster
  • Project Hotel
  • Project Biro

 

In addition to these projects being affected, Armscor noted the severe impact of the reduction in Defence spend on the indigenous Defence Industry. The reduction in Defence Spend is resulting in:

• Loss of capability (skills) and capacity in the industry
• Loss of jobs
• Loss of strategic capabilities to the SANDF
• Reduction in competitive edge of the local industry
• Reduced capability of the SANDF due toObsolete and technologically aged equipment, an inability to properly maintain critical systems (aircraft, vehicles, etc) and a loss of technological competitive edge i.e. force multiplier effect.

 

4.       HOW WILL THE REVISED BUDGET IMPACT ON THE RECOMMENDATIONS MADE DURING THE BUDGET VOTES?

 

The Committee made the following recommendations in its June 2020 Budget Report that may be impacted by the revised Special Adjustments Budget:

 

• The Committee remains concerned around the status of Projects Hoefyster, Biro and potentially Hotel. Armscor is requested to provide the Committee with a breakdown of milestones in each of these projects, which milestone were achieved, which milestones are set to be achieved in the medium- to long-term (including projected achievement dates), and the funds required for each milestone. It should also be indicated whether these funds have been earmarked from within the Special Defence Account or whether it is still to be appropriated. This information should be provided to the Committee before 15 June 2020 and will inform further engagement between the PCODMV, Armscor and the DOD.

This concern is amplified by the current financial situation and was highlighted as such by Armscor during its presentation.

 

• The Committee encourages Armscor to expand the number of rural schools to which it conducts outreach programmes and to report on these in the 2020/21 Annual Report.

This recommendation is unlikely to be fulfilled due to Covid-19 travel restrictions and budgetary constraints.

 

• Given expected economic constraints over the medium-term, the Committee encourages Armscor to maintain austerity measures and to find additional means of (1) cost saving and (2) increasing revenue generation. The Committee also encourages the Board to take into account the difficult financial climate when considering performance bonuses and similar expenses. The long-term viability of Armscor amid challenging economic circumstances should be foremost in future planning.

The reduced transfer to Armscor under the Special Adjustments Budget further highlights the need for austerity. Cost savings measures were highlighted to the Committee during the Armscor presentation on 8 July 2020, but these are subject to Board approval.

 

 

5.       COMMITTEE OBSERVATIONS

 

During deliberations with Armscor, Members of the PCODMV made the following observations related to Special Adjustments Budget:

 

• Members expressed concern around the potential lack of funding for major acquisition projects, including projects that are currently underway such as Projects Biro, Hotel and Hoefyster.
• In relation to the concern around ongoing projects, Members also expressed concern on the potential impact of a lack of funding for such projects on Denel. Armscor informed the Committee that it currently has orders to the value of R4.3 billion with Denel, which is 42% of its order-book.
• The Committee highlighted the threat of penalties should Armscor and the DOD pull out of committed projects, especially given that the Committee was informed that such penalties would be extremely high in cost.
• The Committee was informed that Armscor currently has around R800 million in reserves, but that these are earmarked for buildings, the medical programme for the Dockyard, etc. Around R500m is allocated and R300m will now be depleted by the lowered transfer.

 

6.       COMMITTEE RECOMMENDATIONS

 

Based on its engagement with Armscor, the Committee makes the following recommendations in relation to the Special Adjustments Budget:

 

• The Committee encourages the Executive Authority to engage National Treasury and the relevant role-players regarding the future funding of ongoing projects. The Committee further urges the relevant role-players to seek solutions that will protect the investments made towards the projects.
• The Committee encourages Armscor and Denel to continue deliberations and to find solutions for the management of the R4.3 billion order book currently with Denel. The Committee specifically urges Denel to ensure timely and cost-effective delivery on paid projects.
• Armscor should submit a report to the Committee outlining the progress with the cost-saving initiatives it undertook.
• The Committee appreciated the fact that Armscor could build up a reserve fund of R800 million. Armscor was urged to utilise these funds wisely for the long-term sustainability of the entity.
• Armscor is encouraged to implement a zero-based budgeting approach within the Medium-term Expenditure Framework.

 

7.    CONCLUSION

 

The Committee thanked the Department of Defence, the Castle Control Board and Armscor for its efforts to support its soldiers/employees to fight the effects of the pandemic and wished it well with the execution of their respective mandates. The Committee encouraged these agencies to further enhance its efforts to successfully bridge these difficult times and to ensure that those it serve and support, remain the focus of their collective efforts.

 

Report to be considered.