ATC201202: Budgetary Review and Recommendation Report of the Portfolio Committee on Defence and Military Veterans on the 2019/20 Annual Report of Armscor and the Castle Control Board (Ccb), Dated 2 December 2020

Defence and Military Veterans

BUDGETARY REVIEW AND RECOMMENDATION REPORT OF THE PORTFOLIO COMMITTEE ON DEFENCE AND MILITARY VETERANS ON THE 2019/20 ANNUAL REPORT OF ARMSCOR AND THE CASTLE CONTROL BOARD (CCB), DATED 2 DECEMBER 2020.

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

The Portfolio Committee on Defence and Military Veterans (PCODMV), having considered the 2019/20 annual reports of the Armaments Corporation of South Africa (ARMSCOR) and the Castle Control Board (CCB), on 17 October 2020 and 25 November 2020, reports as follows:

INTRODUCTION

1.1 Mandate of the Committee

The Portfolio Committee on Defence and Military Veterans (PCODMV) is mandated to oversee the Department of Defence and Military Veterans (DODMV) and its entities – namely the Armaments Corporation of South Africa (ARMSCOR) and the Castle Control Board (CCB), to ensure that the entities fulfil their mandates through the monitoring of the implementation of legislation and adherence to policies. These policy guidelines assist the Committee in its oversight activities.

1.2 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 BRRR 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.

In October of each year, parliamentary portfolio committees compile a BRRR that assess performance given available resources; evaluates the effective and efficient use and forward allocation of resources; and makes 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.

Given the above, and in the context of the extended deadline to departments and entities for the submission of annual reports, the PCODMV utilised the 2019/20 draft Annual Reports of Armscor and the CCB to compile the preliminary assessments of performance for 2019/20 before a BRRR will be finalised when Annual Reports are submitted from 16 November 2020. This was followed by engagements with the entities on 25 November 2020, after the Annual Reports have been received.

PART A: ARMAMENTS CORPORATION OF SOUTH AFRICA (ARMSCOR)

1.1 Description of core functions of Armscor

The Armaments Corporation of South Africa SOC Ltd (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. Armscor differs from other entities in the Defence Portfolio as it is largely self-funded and profit-driven. Parliamentary oversight of Armscor aims to strike the balance between corporate efficiency/sustainability and effective service delivery to the SANDF.

2. OVERVIEW OF THE KEY RELEVANT POLICY FOCUS AREAS

2.1 State of the Nation Addresses (SONA) (2014 – 2019):

During the five SONAs held over the previous Medium-term Strategic Framework (MTSF), 2014 to 2019, the President indicated government had embarked on a radical socio-economic transformation to address the triple challenges of poverty, inequality, and unemployment. The pronouncements of the SONAs that continue to have a bearing on the defence portfolio are:

promotion of local procurement;
employment of the youth;
expansion of Internship Programmes in government;
resourcing of defence mandates;
improving implementation of the financial disclosures framework;
support the employment of SANDF (Interim ACIRC, conflict prevention, and peacekeeping of the African continent);
spending of public funds and reducing expenditure;
acknowledgement that the African continent remains central to government’s foreign policy engagements; and
unlocking growth and peacekeeping operations.

Armscor supports the DOD to achieve pronouncements of the SONAs.

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 of the NDP relevant to Armscor include the following:

Sharpening South Africa’s innovative edge by contributing to global scientific and technological advancement.
Enhancing investment in Research and Development and by better utilising existing resources.
Facilitating innovation and enhanced cooperation between public service and technology institutions and the private sector in areas of potential dual use.
Committing to procurement approaches that stimulate domestic industry and job creation.
Procuring from and supporting SMMEs, black-owned and black-managed enterprises, and female led-enterprises, the youth and military veterans.

2.3 The Medium Term Strategic Framework (2014 - 2019)

The Medium-Term Strategic Framework 2014 – 2019:

Cabinet approved the MTSF on 23 July 2014 that was designed to be the mechanism through which departments are expected to align their planning instruments in support of the NDP Vision 2030. The Governmental MTSF Outcomes, to which the DOD will contribute, is supported by Armscor. The Outcomes are:

Outcome 3: “All people in South Africa are and feel safe”

South Africa’s borders are effectively defended, protected, secured, and well-managed: Armscor supports this outcome with regard to providing technology and equipment to the DOD in support of the overarching strategy to defend, protect, secure, and ensure well-managed borders by securing the land, airspace, and maritime borders.

Secure cyber space: Armscor provides support for capacitating a Cyber Security Institution in the establishment of the Cyber Command Centre Headquarters.

Corruption in the public and private sectors is reduced: Armscor will prevent corruption where prevalent and in the execution of Armscor’s mandate.

Outcome 11: “Creating a better South Africa and contributing to a better and safer Africa in a better world”

Political cohesion in Southern Africa, to ensure a peaceful, secure, and stable Southern African region: Armscor supports the DOD by supplying the necessary security equipment.

The Armscor Strategy directly supports the above, but also the following broader governmental outcomes:

• MTSF Outcome 2: “A long and healthy life for all South Africans”;

• MTSF Outcome 4: “Decent employment through inclusive economic growth”;

• MTSF Outcome 5: “A skilled and capable workforce to support an inclusive growth path”; and

• MTSF Outcome 12: “An efficient, effective and development oriented public service and an empowered, fair and inclusive citizenship”.

2.4 Ministerial and Armscor Priorities

Ministerial Priorities

Armscor will, in terms of the Service Level Agreement (SLA) with the DOD, play a supporting role in contributing to the following MOD&MV priorities:

• Defence Strategic Direction: This priority relates to ensuring the provision of ministerial strategic direction to the DOD over the short, medium, and long term. The following evolving end-states will, among others, be pursued in support of this MOD&MV priority:

Defence command and governance accountability relationships clarified in policy
strategic communication direction provided to inform the conceptualisation and rollout across all levels of command, such as a departmental communication intervention; and
strategic direction provided to guide the implementation of the South African Defence Review 2015 (Milestone 1).

• Strategic Resourcing Direction: This priority relates to directing 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. The direction provided to guide the development of a Defence Funding Model will, among others, be pursued in support of this MOD&MV priority.

• Capability Sustainment Direction: This priority relates to reviewing the defence direction of SADI, technology developments, and directing defence acquisition in line with the four milestones of the South African Defence Review 2015. In support of this MOD&MV priority, these evolving end-states will, among others, be pursued:

Defence capability sustainment and renewal;
Defence facilities maintenance;
SADI engagement; and
development and maintenance of strategic reserves.

The increasing need of the DOD for specialised services are having a substantial influence on Armscor’s strategic direction, which also has the imperative that Armscor’s human capital base be continually reviewed as a priority to ensure the emergence of a rejuvenated, dependable, technical human capital base. This is also important in order for Armscor to have the required capability to support the selected upgrading of equipment programmes.

Armscor Priorities

Armscor aims at four strategic objectives:

Revenue generation: Increase in net realisable revenue.
Cost management: Strategic capability maintenance while reducing cost to ensure
sustainability.
Efficient delivery: Reducing the turnaround time of core customer-facing and internal
processes.
Stakeholder management: Developing and maintaining long-lasting strategic relationships.

3. BUDGET REPORT FY2018/19 AND BRRR RECOMMENDATIONS

The Portfolio Committee made the recommendations below regarding the 2019/20 Corporate Plan of Armscor. Armscor is requested to respond to these recommendations during quarterly and annual report briefings to the PCODMV:

The Committee recommends that Armscor should remain focused on its primary mandate as an acquisition agency and balance this with its specialised need for research and development to strengthen its commercial viability and revenue generation.
Armscor should provide further information on the status of the Dockyard and future plans for the location following the termination of plans to shift it to Denel.
Following Armscor’s risk-evaluation investigation on Project Hoefyster, Armscor should provide the Committee with detailed information on the status of the project.
The Armscor Board is advised to conclude the appointment of a permanent CEO as soon as possible.
Armscor should provide the Committee with information on the status of Projects Biro and Hotel, including progress on construction, financials and challenges encountered.
The Committee welcomes Armscor’s commitment to local procurement and encourages the corporation to continue to support local development in this regard.
The Committee notes concerns around Denel raised by Armscor. The Committee recommends an urgent meeting between Denel, the Department of Trade and Industry, the DOD and Armscor to address concerns related to existing and future projects that impact on the DOD. Feedback on this meeting should be provided to the PCODMV following the conclusion of engagements.
The Committee encourages Armscor to engage responsibly in the sweating of assets as a means of generating additional income. Details of this should be provided in quarterly reports as well as all future Annual Reports, including in the 2018/19 Annual Report to be submitted to Parliament.
The Committee urges Armscor to continue to seek commercial opportunities in Africa given the unique services it provides and its positioning on the continent.

3.2 BRRR recommendations

The PCODMV identified the following areas for re-prioritisation which will be subject to monitoring by the Committee throughout the 2018/19 financial year with regards to Armscor:

Given current financial constraints in the defence allocation, the Committee urges Armscor to continue to seek commercial opportunities as a means of raising revenue while continuing to provide quality service to its primary client, the DOD.
The Committee recommends an urgent engagement between Armscor, Denel and the DOD on the status and continued viability of Project Hoefyster. A written report on the status and viability of the project should be presented to the Committee no later than 1 February 2020.
Denel should submit a report to the Committee on all other outstanding projects managed by Denel related to the DOD. Timelines, priority levels and the current status of these projects should be provided in the report. The report should be submitted to the Committee no later than 30 November 2019.
Armscor should provide the PCODMV with a written report on the status of the Armscor Dockyard before 30 November 2019. The report should include the current capacity of the Dockyard, capacity constraints, work completed for the SA Navy, commercial work completed and expansions plans. This document will form the basis for an oversight visit by the PCODMV.
The Committee recommends that footwear purchases for the DOD either be facilitated through Armscor’s Ergonomics division or that assurances should be provided of the quality of footwear procured through the SABS or a related quality control agency. The DOD and Armscor should provide the Committee with a joint report on quality assurance and the future involvement of the Ergonomics division. The report is to be submitted during the First Quarter of 2020.
The Committee urges Armscor’s senior management to respond with urgency to recommendations by the A-G. Following its mid-year engagements with the A-G, Armscor should submit a report to the Committee on issues identified by the A-G and action plans to address these.
The Committee urges Armscor, the DOD and the A-G to finalise a plan to correctly capture tangible assets in order to avoid future misstatements and subsequent adverse findings by the A-G.

4. OVERVIEW OF THE 2019/20 PERFORMANCE OF ARMSCOR

4.1 A brief overview of Armscor performance for the FY2019/20

Based on the Annual Report, some of the highlights for the Corporation for the past financial year include:

Corporate Goals Achievement: Armscor continued to maintain its high level of performance and most of the corporate goals were met and in some cases exceeded in line with the Corporate Plan. All of the strategic capabilities – Acquisition, Research and Development and Dockyard - were able to meet the service level objectives despite the varying challenges that were faced.

Finance: Armscor continues to face a number of challenges, such as financing of the Corporation and sustaining the required research strategic capabilities. In order to generate revenue, Armscor is collaborating with state entities and defence industry players both locally and abroad. The net financial result from operations of the Corporation reflects a surplus of R178.6 million that was as a result of the increase in sale of goods and services, containment of costs and the recovery of bad debts previously provided for.

Acquisition: During the period under review, Armscor managed and executed contracts to a total value of R12.19 billion for the DOD. The number of projects funded under the SDA will likely decrease from 39 to 15 during the 2020/21 financial year. This decrease will have a significant impact on Armscor’s ability to maintain critical capabilities and expertise in strategic domain going forward.

Research and Development: The Business Unit’s total business portfolio of R494.7 million included an allocated grant of R101 million, contracted work from the DOD to a value of R242.98 million and commercial contracts to a value of R127.43 million.

Dockyard: The Armscor Dockyard met its performance obligations in accordance with its performance agreement with the South African (SA) Navy. To this extent, the Armscor Dockyard embarked on an initiative to generate income and augment the shortfall in funding received from the SA Navy through commercial activities.

Transformation of the Industry: Armscor continued to demonstrate its support to the client by spear-heading the drafting of the ground-breaking Defence Industry Charter. The Defence Sector Code was approved by the Minister of Defence and Military Veterans and gazetted on 12 April 2019 by the Minister of Trade and Industry. The Defence Sector Charter Council will be established to oversee and monitor the implementation of the Defence Sector Code.

Human Resources: Human capital is the most valuable asset held by Armscor and remains key in Armscor’s achievement of its corporate goals. The Corporation strives to attract and retain competent and high-performing employees who live by the Corporation’s values and ensures that the mandate of the Corporation is fulfilled.

Corporate Social Investment: Armscor actively supports corporate social investment initiatives that encourage education in mathematics, science and technology.

Corporate Governance: Armscor has operated within the parameters of good corporate governance in all its work throughout the reporting period. Armscor has lived up to its values and has continued to exemplify good corporate governance principles.

4.2 Acquisitions

Acquisitions for the SANDF and other government departments reflect Armscor’s core function, but is coming under increased pressure due to limited capacity by the DOD to engage in capital acquisition. The acquisition responsibility of Armscor can be broadly classified into two main categories being, capital acquisition (funded by the SDA) and system support and procurement (funded by the General Defence Account). Capital acquisition entails projects that cater for technology development, directed systems development and the subsequent production of new defence matériel, while system support and procurement involves operating procurement, maintenance and support of existing equipment and systems. In the 2019/20 financial year, Armscor managed and executed contracts worth R12.19 billion, including the following:

Maintenance and support contracts worth R4.4 billion (compared to R4.32 billion in 2018/19).
Capital acquisition contracts managed worth R7.7 billion (compared to R7.44 billion in 2018/19).

Armscor managed acquisition and maintenance programmes for several defence systems, of which the following should be noted (The majority of these acquisition programmes are multi-year acquisitions and projects will span several years. The ongoing monitoring of these projects to ensure on-time delivery and value-for-money is essential):

Maritime systems. A Hydrographic vessel is being purchased for the SA Navy under Project Hotel. Construction was set to start in 2018 and this was achieved through a steel-cutting ceremony hosted on 30 November 2018. Durban-based Southern African Shipyards (SAS) is the main contractor for Project Hotel to supply the SA Navy with a new hydrographic vessel and ancillary equipment.At the end of 2019/20, construction of the main vessel was 64% complete, and construction of the three small motor boats was 75% complete. Additional tests were required by Armscor, resulting in a five-month delay in the project. During engagements between Armscor and the PCODMV it was indicated that the project is fully funded.

Furthermore, an acquisition process for three new Inshore Patrol Vessels (IPVs) is in progress under Project Biro. Previous Annual Reports noted that, by December 2017, the contract was awarded for the construction of the three IPVs. The contract was awarded to Cape-Town Based Damen Shipyards. A similar tender for three Offshore Patrol Vessels has been put on hold. The 2019/20 Annual Report notes that the IPV contract is progressing according to schedule and that the first vessel is set to launch by the end of 2020. During engagements between Armscor and the PCODMV it was indicated that a deficit of R420 million was in effect on the project but that these funds have since been allocated and the project can be considered fully funded.

Finally, as reported in previous years and observed during the PCODMV oversight visit to Simon’s Town in 2019, midlife upgrades on both the SA Navy’s frigates and submarines are delayed due to a lack of funds.

Airborne systems. The Annual Report notes that the A-Darter Air-to-Air missile was completed at the end of 2019. This marks a significant milestone and offers a unique domestic capability to the SA Air Force. However, the industrialisation and large-scale production of the A-Darter has been significantly delayed by difficulties in Denel. Delivery of the first batch of missiles and initial logistic support capability is expected by the middle of 2020, but the schedule remains at risk due to capacity, capability, supply chain and financial challenges being experienced by Denel. The integration of the missile system on the SA Air Force Hawk aircraft has subsequently been deferred as well.

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. An order for 244 new vehicles was placed with various variants to be delivered to the SANDF. The majority of the new fleet will be constructed in South Africa and a locally designed and manufactured turret is used. While the first batch of 21 vehicles have been delivered from Finland, local manufacturing by Denel has seen significant delays.

2019 Progress: The 2018/19 Armscor Annual Report notes that the project was already 43 months behind schedule by the end of the 2018/19 financial year. Furthermore, “during December 2018, Denel formally notified Armscor and the DOD that it is unable to deliver against the current contract baseline in terms of technical specifications, delivery schedule and price as contracted. The way forward with the programme is being addressed within Armscor and the DOD, and possible alternative approaches with associated implications to mitigate the financial and capability risk to the DOD is being investigated.”

2020 Progress: The industrialisation of vehicle assembly at Denel Vehicle Systems has not shown any significant progress since the previous reporting period, mainly as a result of parts shortages due to non-payment of suppliers. The delivery of the first Battalion consisting of 88 vehicles was contractually scheduled to be completed by May 2019. This date was however not achieved due to delays in the development and industrialisation process, and the latest indicated delivery date for the first battalion is June 2022, however with a low measure of confidence.

In addition to Project Hoefyster, Phase 1 of a new Ground Based Air Defence System (GBADS) for the SA Army was delivered to the Air Defence Artillery Formation. This focused on refurbishing the radar-guided system 35mm guns of the Air Defence Artillery Formation. A second phase of the GBADS is currently under way and focuses on the upgrade of the 35mm anti-aircraft guns’ Fire Control system. The project is, however, not fully funded. Despite not being fully funded, it is anticipated that the product baseline, which will conclude the development work of this phase will be achieved by March 2021.

4.3 Defence Industrial Participation

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. The DIP Policy was revised in October 2015. In 2019/20, Armscor managed 17 such agreements, which is higher than the 15 managed in 2018/19. Only one of the current DIP agreements is not related to the military (it relates to a SAPS pistol acquisition project). The obligation of DIP credits being managed remained similar to the previous financial year and comes to a total of R23.065 billion compared to R22.589 billion in 2018/19. During the current financial year, R116 million in DIP credits were passed, as follows:

DIP agreements related to ongoing defence projects (16): R108 million
DIP agreements related to the SAPS (1): R8 million

In previous years it was noted that one DIP agreement related to the 1999 Strategic Defence Procurement remained under the management of Armscor. This refers to an agreement with MBDA (a European based missile developer and manufacturer). After multi-year extensions, the 2019/20 Annual Report indicates that the obligation was concluded by MBDA paying a settlement amount to Armscor in terms of the DIP agreement. As such, no further outstanding obligations remain in terms of the 1999 Strategic Defence Procurement. The DIP agreement for supply of inshore patrol vessels was concluded in February 2020, and one claim has already been processed in this financial year.

4.4 Defence Materiel Disposal

Armscor also manages the disposal of defence equipment for the DOD. Armscor’s Defence Disposal Solutions (DDS) mandate provides for the disposal of excess and obsolete defence matériel on behalf of the DOD. Defence matériel to be disposed includes items such as ammunition, aircraft, spares, vessels, and land-and/or air-based equipment. Disposal of the defence matériel is carried out in accordance with the requirements of the DOD and regulatory authorities such as the NCACC and the National Non-Proliferation Council. During 2018/19, Armscor concluded orders to the value of R8.5 million. However, no amount was indicated in the 2019/20 Annual Report. this is of concern given that the 2018/19 Annual Report noted that “with the expedited disposal initiative in place, more sales are expected to be realised in

the near future.”

4.5 Research and Development

The Annual Report indicates that Armscor managed to earn R494.7 million from research and development projects in 2019/20, which is in line with the preceding year. Research work contracted from the DOD constituted R242.98 million, which is significantly lower than the R337.6 million contracted in 2018/19. Commercial contracts for 2019/20 were valued at R127.43 million, which is lower than R152.3 million achieved in the previous year. The DOD also received a grant from the DOD for R101 million. The main reasons for the provision of the grant is not contained in the Annual Report. The bulk of research and development services took place at Research and Development Facilities such as the Gerotek and Alkantpan test facilities as well as Hazmat protective systems.

Alkantpan is a munitions test range in the Northern Cape Province and attracts a number of local and international clients. Several international and domestic clients perform tests at the facility. Major milestones reached in 2019/2020 included the finalisation of the upgrading of tracking radars at the facility, allowing projectile testing to be effectively tracked. Funds were also secured for a new airstrip at the facility that will allow unmanned aerial vehicles (UAV) to land at the facility for testing. Armscor further reports in the Annual Report that, similar to 2018/19, performance of Alkantpan was negatively affected by an incident at Rheinmettal Denel Munitions (RDM) in Cape Town in 2018 resulting in a deadlock between RDM and the National Conventional Arms Control (NCACC).

Hazmat produces respiratory equipment for military and commercial purposes. The demand for military respiratory products diminished and Hazmat successfully transformed the business from only supplying the DOD with Chemical and Biological Warfare filters to a range of commercial PPE products, which are sold to the safety industry. At the end of the review period, sales increased significantly due to an unfortunate outbreak of the Covid-19 pandemic. Hazmat’s sales (R15.9 million) for the financial year exceeded budgeted sales by 16%. The ability of Hazmat to produce required products during a pandemic shows the value of sovereign manufacturing capabilities such as Hazmat.

Other defence science technology institutes that receive the bulk of their funding from the DOD include:

Gerotek: Gerotek Test Facilities was established to meet South Africa's needs to test defence‑related products and to maintain key facilities, equipment, capabilities and technologies for that purpose.However, Gerotek has attracted numerous international and other private sector clients in recent years, forming an important part of Armscor’s ability to diversify its income streams.
Armour Development: Conducting of defensive and reactive armour development. Funded by the Research and Development Board. During the reporting period, all significant milestones on armour protection that could be used for current and future armour systems for the DOD were achieved and completed.
Protechnik laboratories: Focus on chemical and biological defence. Two key highlights are noted for 2019/20. Firstly, Protechnik successfully competed in an Organisation for the Prohibition of Chemical Weapons (OPCW) open tender process for the offering of the annual Analytical Chemistry Course (ACC) to African Member States. Second, Protechnik played an important role in testing chemicals and other products for efficiency during the initial phases of the Covid-19 outbreak. Protechnik designed, tested and evaluated a hand sanitiser and surface disinfectant with strict adherence to guidelines from the World Health Organisation that was distributed to the DOD and Armscor and sold to other state departments.
Institute for Maritime Technology: Provision of techno-military expertise to support naval decision-making. The IMT is involved in various programmes, including the successful development of an Underwater Signature Multi-Influence Range Measurement System. One of the major projects that the Institute is working on is the Ultrasonic Broken Rail Detector, which has significant commercial potential. In the 2018/19 Annual Report, Armscor indicated that a commercial product is to be available by mid-2019/20. The 2019/20 Annual Report states that the Ultrasonic Broken Rail Detector test pilot in India was successfully completed and acknowledged by Indian Rail. During the engagement between the PCODMV and Armscor on 25 November 2020 it was indicated that a final payment from Indian Rail is expected and that the IMT will aim at gaining further contracts not only in India but in other countries as well.
Ergonomics technologies: Focus on integrating ergonomics into the SANDF.
Defence decision support institute: Provision of decision support to the DOD.
Flamengro: Computer aided engineering centre of excellence.

Finally, Armscor has indicated to the PCODMV in the past the importance of exploiting Intellectual Property (IP) as a means of generating revenue. This excludes sovereign IP that can only be exploited after due consideration. To this extent, Armscor established the Intellectual Property Management Division. In 2019/20, only one IP exploitation request was received by the Armscor’s Board of Directors. This request was processed and recommended by Armscor’s Board of Directors.

4.6 The Armscor Dockyard

The Armscor Dockyard serves as the primary maintenance supplier to the SA Navy. It has come under increasing strain in recent years due to financial concerns and this has impacted on the Dockyard’s ability to provide all required services to the SA Navy. As such, a Renewal Strategy was developed to eliminate the institution’s financial deficit and increase efficiency. The Renewal Strategy will be implemented over three years, with the first phase focusing on eliminating the financial deficit. The 2019/20 Annual Report notes that progress to date yielded the desired results and the implementation is ongoing.

The Armscor Dockyard’s performance is based on a service level agreement between the SA Navy and Armscor. This is reviewed annually, and signed off against the mutually agreed milestones at the end of the reporting period. In this regard, the Dockyard met all its obligations and performances. All projects were delivered within the mutually agreed milestones. The Annual Report further highlights the specific and ad hoc repair and maintenance conducted on specific SA Navy vessels. The Dockyard is also engaged in the process of re-establishing its internal combustion engine maintenance capability. This capability was in the Armscor Dockyard but deteriorated over time as most of the maintenance work on the Navy’s diesel engines was outsourced.

Crucially, amid current financial constraints, Dockyard embarked on an initiative to generate income and augment the shortfall in funding received from the SA Navy through commercial activities. This is done by engaging local marine and manufacturing commerce to utilise idle capacity to generate income. This is currently being done through several ship repair agents that are bringing their commercial work to be done in the Armscor Dockyard.

5.HUMAN capital MANAGEMENT

The 2018/19 Annual Report indicates that Armscor, including the Armscor Dockyard, has a staff complement of 1 556, which is higher than the staff complement of 1 467 in 2018/19. Armscor developed an Employment Equity Plan, partially focused on increasing the number of black women and persons with disabilities in the entity. The plan was in place until March 2020. Currently, in terms of Employment Equity, 82.97% of the Armscor Human Resources contingent are black. This is a further increase from 2018/19 when the percentage stood 80.23%. The 2019/20 Annual Report further indicates that 38.43% of employees are female, which also represents an increase from the 36.95% in the preceding year.

Armscor should also be lauded for identifying capability retention and succession planning as key focus areas. In 2019/20, 90 key position were identified as well as 88 potential successors and a mentorship programme initiated. This translates to an 84% compliance with the development plan as contracted with successors. A positive initiative from Armscor that has been in place for several years is that it continues to provide skills development through a number of programmes, the following of which are noteworthy:

Bursaries. 37 Bursaries were made available to undergraduate students at various universities This is in line with the 35 bursaries awarded in the preceding year.
Defence Engineering and Science University Programme. In 2019/20, 104 students were funded for the 2019 academic year.
Graduate Development Programme. For 2019/20, 40 candidates participated in this programme.

Unlike previous years, the 2019/20 Annual Report does not indicate any international training opportunities presented by Armscor. For example, in 2018/19, two employees were registered for Masters in Science: Military Aerospace and Airworthiness, studying for an Advanced Masters in Unmanned Aircraft Systems Management programme.

6. PERFORMANCE OVERVIEW: UNDER ACHIEVEMENTS AND CHALLENGES

Armscor performed relatively well when performance against set targets are measured. A total of 34 Key Performance Indicators (goals) were set for 2019/20 in relation to its Service Level Agreement Requirements and Group Performance Targets. Armscor managed to achieve 28 of these, which is a success rate of 82.35%. This is an improved performance when compared to the 75% achievement of 2018/19.

Prior to highlighting targets not achieved, it should be noted that previous years’ Annual Reports had a target related to a percentage increase in commercial income from Research and Development facilities. This target was not included in the 2019/20 Report and is concerning given the apparent need for commercial income amid financial constraints.

Table 2: Selected Key Performance Indicators not achieved/partially achieved in 2019/20

Objective	KPI	Goal	Achievement	Comments
Procurement	Percentage of DOD system support and procurement requirements converted into orders placed including: Receipt of requirement. Assessment and confirmation of requirement. Initiation of sourcing solution. Approval and placement of order.	95%	92.45%	DOD requirements to the value of R824.18m were received. Armscor committed R761.99m of the above mentioned funds resulting in an achievement of 92,45%.
Revenue Generation	Revenue generated from the Business Enablement Business Unit.	R85.2 million	R31.8 million
Infrastructure renewal	Implementation of the approved application system renewal plan.	80%	40%	Request for Bid was published on 12 March 2020, however only 40% of theapproved application system renewal plan was implemented.
Infrastructure renewal	Development of SCM (e-procurement, and commercial/military off-the-shelf procurement), dependant on SCM solution.	31 March 2020	No opportunity to perform	This initiative is a remnant of the corporate objective (Armscor Corporate Plan 2018/19) that was to be completed on 30 March 2020. After implementation of the SCM Module that could not be achieved, as a result of the cancellation of an ERP contract, due to non-performance of the service provider. Board approval 18 March 2020.
Stakeholder management	Conduct integrated employee engagement survey and determine new baseline.	New baseline	No opportunity to perform	The survey could not be completed due to absence of employees as a result of Covid-19 National Lockdown Regulations
Transformation of corporation	improving female representation (overall).	40%	38.43%

7.FINANCIAL STATEMENTS and auditor-general findings

The total comprehensive income of the Group decreased from a surplus of R235.311 million in 2019/20 to a surplus of R178.658 million in 2019/20. Revenue generated increased from R1.754 billion in 2018/19 to R1.801 billion in 2019/20. However, this increase should be seen in context as it comprises an increased state allocation. The state allocation increased significantly in recent years from R860 million in 2016/17, R1.047 billion in 2017/18, R1.105 billion in 2018/19 to R1.146 billion in 2019/20.

During the period under review, Armscor did manage to increase sale from goods and service which increased from R381 million in the previous year to R430 million in 2019/20. Income from interest also increased significantly from R78.6 million to R104.7 million over the same period. Of concern, however, is the reduction in rental income from R143.6 million to R68 million.

The following additional financial matters should also be noted:

Employee-related costs increased from R1.116 billion in 2018/19 to R1.125 billion in 2019/20.
Salaries and wages decreased from R826.099 million in 2018/19 to R818.162 million in 2019/20.
Under General Expenses, Armscor notes ‘fines and penalties’ of R690 000, while no such costs were incurred in the previous financial year.
Compensation for executive directors decreased from R10.984 million in 2018/19 to R8.796 million in 2019/20. High spending during the preceding financial year could be ascribed to the need for an acting CEO during the latter part of the 2018/19 financial year.
Compensation of non-executive Directors decreased from R6.209 million in 2018/19 to
R6.168 million in 2019/20.

Finally, ongoing litigation against Armscor should also be considered:

€ 192 million against Armscor for services allegedly rendered by Plaintiff’s (Beverly Securities Ltd and Beverly Securities Inc.) in establishing a clandestine Portuguese channel during the 1980’s for transportation of 50 Oryx helicopters. The case is only awaiting expert witness submissions and a court date in Lisbon is expected in the near future.
€ 17.62 million and R258 168 against Armscor and Denel by Patria Land Systems (this relates to Project Hoefyster). The Plaintiff (Patria) claims that Denel and/or Armscor did not accept work delivered in accordance with an agreement entered into between Denel and the Plaintiff and furthermore demand payment of a number of invoices issued to Denel. The Plaintiff further claim that Armscor and Denel have entered into a stipulatio alteri for the benefit of Patria in terms of which Armscor would be liable for the invoices issued by Patria to Denel.

The Auditor-General of South Africa (AGSA) noted that Armscor improved on its outcomes as the auditee obtained a clean audit. The AGSA made no findings against Armscor in terms of compliance with key legislation. Furthermore, the AGSA noted effective levels of leadership, record keeping, daily and monthly controls, review and monitor compliance as well as risk management.

8. COMMITTEE OBSERVATIONS: ARMSCOR

The Committee made the following general observations on the 2019/20 Annual Report:

The Committee notes with concern the impact of the decline in the defence budget on Armscor and the fact that this results in limited acquisition projects for the DOD, the primary client of Armscor.
Members expressed concern around the underutilisation of defence materiel disposal by Armscor, specifically as it noted that in 2018/19 the expedited disposal initiative resulted in more sales.
Members also questioned whether additional defence materiel disposal on behalf of other countries, cannot be utilised to generate further revenue for Armscor and the DOD.
Members raised concern around the significant reduction in rental income noted in the 2019/20 Annual Report compared to previous years.
The Committee expressed its great concern around the impact of Denel’s inability to deliver on defence contracts and the impact that this has not only on Armscor and the DOD, but also on the broader Defence Industry.
Specific concerns were raised by Members around the ongoing delays with regards to Project Hoefyster that leads to questions on the ongoing viability of the project. The Committee took note of Armscor’s indication that options around the way forward have been presented to the Minister of Defence and concrete decisions will be made at the next Armaments Acquisition Council meeting chaired by the Minister.
Members highlighted the continued need for Armscor to contribute to the transformation of the Defence Industry.
Members recalled previous commitments by Armscor that, due to financial constraints, it will not pay bonuses for senior management form 2020/21. Members noted that bonuses paid in 2019/20 was based on existing contractual agreements and that the payment of bonuses was approved by the Armscor Board.
Members expressed concern around the management and disposal of obsolete and redundant ammunition stockpiles in the SANDF.
The Committee noted the need to protect intellectual property in Armscor and the broader South Africa Defence Industry and to ensure that, where possible, these can be transformed into profit generation for Armscor, Denel and/or the broader defence industry.
Members noted that previous spending on consultants came at a significant cost and that the implementation of revenue-generation initiatives identified by such consultants are slow to show results.
The Committee welcomed the announcement that Projects Biro and Hotel are fully funded despite indications by the DOD’s Chief Financial Officer that funding is not available. The Committee will continue to monitor these projects closely.
The Committee noted that there were currently no Public-Private Partnerships involving Armscor but that Service-Level Agreements (SLAs) have been signed with other state entities such as the South African Police Service.
The Committee received an explanation as to the legal claims against the entity and will continue to monitor progress in this regard.

9. COMMITTEE Recommendations

Based on its analysis and overview of the 2019/20 Annual Report, the Committee makes the following recommendations:

The Committee congratulates Armscor on achieving a clean audit from the AGSA for 2019/20.
Armscor should provide the Committee with a full report of the repair and maintenance status of the SA Navy’s frigates and submarines and what the long-term impact will be of the current lack of maintenance due to a lack of funding.
The DOD, Armscor and Denel should jointly re-evaluate the feasibility of Project Hoefyster and present the Committee with a way forward. Key to this outcome should be a focus on SANDF capability as well as fiscal stability. The Minister, subsequent to the Armaments Acquisition Council meeting where a decision will be taken on Project Hoefyster, should provide detailed written feedback to the PCDMV on the outcome and the way forward.
Armscor should provide the Committee with a comprehensive list of all funds paid to Project Hoefyster thus far, losses incurred, existing litigation related to Project Hoefyster, and potential litigation that may materialise over the MTEF, should delays with Project Hoefyster continue.
Armscor should provide the Committee with a report on the operational impact of the lack of industrialisation of the A-Darter project on the SA Air Force’s capabilities as well as the status of commercialisation of the A-Darter project.
The underutilisation of defence materiel disposal is of specific concern given the need for revenue generation in the DOD. Armscor and the DOD are urged to speed up delivery in this regard and report back to the Committee on the status of the expedited disposal initiative.
Armscor should report to the Committee to what extent it is involved in the management and disposal of obsolete and redundant ammunition on behalf of the SANDF. The entity should also elaborate on the status of such ammunition under its control.
Armscor should provide the Committee with a report on the exact financial impact of the deadlock between the National Conventional Arms Control Committee (NCACC) and Rheinmettal Denel Munitions (RDM) on Alkantpan as well as the plan to resolve this impasse in order for Alkantpan to generate much needed revenue.
The Committee encourages Armscor to seek commercial opportunities, including the sweating of assets, as a means of raising revenue for all its research and development institutes amid the decreasing DOD acquisition and funding.
The Committee welcomes efforts to re-establish an internal combustion engine maintenance capability at the Armscor Dockyard. Armscor should provide the Committee with quarterly updates on progress in this regard.
Armscor, as part of the Defence Industry, should enhance its transformation efforts to align itself with the Defence Industry Charter.
It is recommended that Armscor should re-instate the target ‘percentage increase in the commercial income from Research and Development facilities’ in all its Annual Reports over for MTEF.
Measures should also be put in place to improve revenue generated from the Business Enablement Business Unit and Armscor should report back to the Committee in this regard.
The Committee encourages renewed engagement between Armscor and Denel to ensure the sustainability of existing and future defence contracts.
Armscor should ensure that Intellectual Property at Armscor and the broader Defence Industry is protected.
The Committee urges Armscor to be fiscally responsible and, in the context of current financial constraints, maintain its undertaking that it will not pay bonuses in 2020/21.
The Committee welcomes the appointment of a new Armscor Board and urges to Board to ensure the sustainability of Armscor, the promotion of the broader defence industry and the provision of quality service to its main client, the DOD.

The Committee encourages the Minister of Defence to relay to Cabinet the dire consequences of any potential collapse of Denel to Armscor, the broader defence industry and the SANDF’s operational capability.

PART B: CASTLE CONTROL BOARD (CCB)

1. DESCRIPTION OF CORE FUNCTIONS OF THE CASTLE CONTROL BOARD

The mandate of the Castle Control Board (CCB) is derived from the Castle Management Act, 1993 (No. 207 of 1993) which requires it to preserve and protect the military and cultural heritage of the Castle of Good Hope (CGH), South Africa’s oldest architectural structure - on behalf of the Minister of Defence and Military Veterans. Both the National Heritage Resources Act (No. 25 of 1999) and the Defence Endowment Property and Account Act (No. 33 of 19922) also cover certain aspects of the mandate. This Report will focus on the:

Strategic Overview for the 2019/20 Financial Year with specific reference to Strategic Priorities of Government and Strategic Priorities of the CCB.
Overview and Assessment of Financial Performance with specific reference to the Appropriation statement for the 2019/20 financial year; Financial statements; and Findings of the Auditor General of South Africa.
Overview and Assessment of Programme Performance focusing on the four Programmes.
Governance and Human Resources.

2. STRATEGIC PRIORITIES OF GOVERNMENT AND THE CCB.

2.1 State of the Nation Address2019

President Cyril Ramaphosa during his SONA on 7 February 2019 made the following remarks that can be related to the mandate and activities of the CCB:

“We resolved to cure our country of the corrosive effects of corruption and to restore the integrity of our institutions.” The CCB has a Fraud Prevention Policy that also addresses criminality and states that it is serious to prevent such activities.
“During SONA last year, we spoke at length about the huge potential that exists for the expansion of the tourism sector. Our concerted efforts to market South Africa as a prime destination for tourists have yielded positive results, with significant annual growth in the number of foreign visitors.” The CCB is reliant on visitors to the Castle, both local and international, and it was encouraging that the President prioritised the Tourism Industry in his Speech.
“Given the key role that small businesses play in stimulating economic activity and employment – and in advancing broad-based empowerment – we are focusing this year on significantly expanding our small business incubation programme.” The focus of the CCB to involve local businesses is important as well its annual target of paying invoices within 30 days.

2.2 National Development Plan and the Medium Term Strategic Framework (2014 - 2019) Priorities

As opposed to previous years, the CCB’s Annual Report for FY2019/20 does not make any reference to the NDP and the only reference to the MTSF is by the Auditor General. The Committee will enquire about the reasons for this, especially since the 2019/2020 Annual Performance Plan[1] 2019/20 makes reference to these national priorities.

3. Summary of previous recommendations of the Committee

3.1. 2019 BRRR Recommendations

The Portfolio Committee made the following recommendations to the CCB on its 2018/19 Annual Report:

The Committee recommends that the leadership of the CCB should put the necessary controls and measures in place to ensure that all assets and financial transactions are properly and correctly captured to facilitate an improved audit opinion.
The CCB is focused on attracting visitors, both local and foreign and does it have a preferential rate for locals. The Committee therefore encouraged the CCB to enhance its marketing abroad and to consider a preferential rate for locals.
Although the security within the CGH has been improved, the CCB is experiencing challenges with security around the CGH given that this is in the purview of the Metro Police and the SAPS. The Committee therefore recommends that the CCB engage further with these agencies and if need be, solicit the assistance of the Portfolio Committee to address this challenge.
The financial sustainability of the CCB is precarious and the Committee recommends that the CCB enhance its revenue generation activities further and that it should present an action plan to the Committee by the end of March 2019 in this regard. This should ideally reflect a lesser reliance on the DOD and focus on cost-saving measures and revenue enhancing activities.
Given the relative high costs for the AGSA and the costs for an audit review, the Committee undertake to engage the AGSA on this issue.
The Committee expressed its concern around the frozen posts although it took note that this was a should be filled given the centrality of the Marketing and Events manager to generate revenue for the CCB.
Regarding the decreased utilisation of interns, and the focus that government departments and entities should have on youth employment, the Committee recommends that once the revenue has increased, the utilisation of interns be enhanced.
The CCB agreed that the can play an enhanced role in nation-building and the Committee therefore urged the CCB to improve its efforts in this regard.

4. STRATEGIC OVERVIEW: HIGHLIIGHTS AND CHALLENGES

4.1 Strategic Outcome oriented goals

The 2019/20 Annual Performance Plan of the CCB referred to its Strategic Outcome oriented goals as:

To ensure effective administrative management in terms of corporate governance and professional competent corporate image.
To develop the museum and interpretative components of the Castle and its related themes through continuous research and development.
To ensure promotion of the Castle as a must-see and vibrant tourist destination accessible to all the citizens of South Africa and the world.
To ensure the accessibility of the Castle as an attractive and user-friendly centre of cultural significance by all sectors of the community.

4.2 Highlights

The Chairperson and Chief Executive Officer of the CCB highlighted the following:

An unqualified audit opinion from the AGSA. (The AGSA has not yet published it finalised findings)
Completion of the Castle’s first-ever DOD-funded Integrated Conservation Management Plan (ICMP).
R3 million relief support to the CCB during the COVID-19 crisis.
Building long-term, working heritage partnerships
The appointment of the gardening and maintenance service provider.
Managing to open the doors of the Castle of Good Hope to an inclusive, multi-cultural and diverse visitor audience.
Visitor numbers stood at 195 054, slightly below the record 2018/19 figure of 201 756, but above the APP target of 170 000.
Despite the struggling Western Cape tourism economy, managed to self-generate R5 516 780.

4.3 Challenges

These include the following:

Regressing to two subsequent unqualified audit opinion from two consecutive clean audit opinions.
Going concern status. Freezing of vacant positions in the interim to secure its going concern status.
Theurgent need for a nominal operational subsidy for the organisation between R850k and R1.2m per annum from the DOD, in addition to the annual R4.5 million maintenance and repairs support from the DOD.
The departure of three managers and two other staff members.
Little progress to review the Castle Management Act (No. 207 of 1993), which started in July 2013.
Tackling the safety and security risks at the entrance and around the Castle.

4.4 Focus during the new Financial Year: Challenges and Opportunities

Dealing with the challenges and opportunities a post-COVID-19 world;
Formalising the legal agreement between the Executive Authority and the Board;
Seriously addressing the going concern and sustainability challenges once and for all;
Pursuing the review of and possible amendments to the Castle Management Act;
Tackling the safety and security risks at the main entrance and around the Castle;
Pursuing the Castle’s UNESCO World Heritage Site listing;
Roll-out of the CCB’s Responsible Commercialisation strategy to drive sustainability; and
Maintain and strengthening institutional, corporate, and administrative management processes at the CCB.

5. OVERVIEW AND ASSESSMENT OF FINANCIAL PERFORMANCE

5.1 Financial Performance for the 2019/20 Financial Year

The under-expenditure for the CCB for the FY2019/20 was R3 113 000 versus the R789 000 for
FY 2018/19. This is mainly due to the under-expenditure of R2 732 000 in Administration Programme, R234 000 in the Conservation Programme, the R6 000 in the Tourism Promotion Programme, and
R141 000 in the Public Access Programme.

Table 1: Budget for FY2017/18 to FY2019/20

Programme	2017/18 R’000		2018/19 R’000		2019/20 R’000		(Over)/Under Expenditure
	Budget	Actual Expenditure	Budget	Actual Expenditure	Budget	Actual Expenditure	(Over)/Under Expenditure
Administration	7 683	7 565	7 061	6534	8 031	5 299	2 732
Conservation	528	570	525	230	662	428	234
Tourism Promotion	63	39	60	3	15	9	6
Public Access	264	279	204	294	250	109	141
Total	8 538	8 453	7 850	7 061	8 958	5 845	3 113

In FY 2018/19, Programme1: Administration’s expenditure was 92% and this dropped to 66% in FY2019/20, and this should be read with the sharp drop in Tourism promotion between FY2018/19 and FY2019/20, from a target R60 000 to R15 000. It is encouraging that the expenditure on Conservation has increased from 5% the previous year to 60% for the year under review and the CCB should be encouraged to continue on this trend. The overall decrease in expenditure from 90% in FY2018/19 to 62% in FY2019/20 is largely due to under expenditure in the HR environment and the CCB should indicate how they plan to they will fill those posts again, if there is no improvement in revenue generation.

Table 2: Revenue FY 2017/18 - 2019/20

Source of revenue	2017/18		2018/19			2019/20
	Estimate	Amount collected	Estimate	Amount collected	(Over)/under collection	Estimate	Amount collected	(Over)/under collection

Sales	4 500	4 124	5 000	4 383	617	5 870	3 921	1 949
Rental income	3 465	1 132	2 220	1 322	898	2 456	1 496	960
Other income	324	450	575	3 243	(2 768)	622	394	228
Interest income	249	117	55	14	41	10	0	10
TOTAL	8 538	5 823	7 850	9 062	(1 212)	8 958	5 811	3 147

Similar to the FY2017/18 and FY 2018/19, the CCB states that “Sales income is in line with our estimates for the year. However, the provision made to compensate for the access to our historic surplus funds, skews this estimate thus painting a picture of under-performance.” As opposed to an over collection of R1 212 000 in the previous year, the CCB had an under collection of R3 147 000 for the year under review and it implies that the CCB only collected 65% of the estimated amount. Of concern is the dwindling Interest income over the three years and especially the current year where no Interest income was received.

Similar to the previous two Annual Report (FY2017/18 and FY2018/19) the Annual Report states that the CCB plans to address the revenue challenge through, inter alia, the roll-out of their Revenue Generation Strategy. They have opened a Gift Shop, started to promote the state-of-art Conference Centre to generate income, recruited a new restauranteur to improve turnover and will focus on high-yield events for the site. In the areas of administration, they will settle their human resource component. The CCB has been publicising their Revenue Generation/Optimisation Strategy for the last three years and yet it reported the under collection of revenue for at least the last three years as indicted above.

5.2 Financial statements

Irregular expenditure Unauthorised Expenditure and Fruitless and Wasteful Expenditure

No Irregular expenditure has been listed for the FY2019/20, similar to FY2018/19.

Unauthorised Expenditure and Fruitless and Wasteful Expenditure

For the third year running, no unauthorised expenditure nor Fruitless and Wasteful Expenditurewere incurred during the year under review, nor in the previous financial year

5.3 Findings of the Auditor-General of South Africa

For the FY2019/20, the CCB received an unqualified audit opinion from the AGSA versus an unqualified audit opinion for FY2018/19 and clean audit opinions for FY2016/17 and for FY2017/18. The current audit opinion relates specifically to the financial statements.

5.3.1 Going Concern

In paragraphs 4.3and 4.4 above, disquiet around the Going Concern status of the CCB has been raised. Similar to FY2018/19 the AGSA notes the “Material uncertainty relating to going concern” where it draws attention to the financial statements’ Note 25, which deals with subsequent events and specifically the possible effects of the future implications of COVID-19 on the entity’s future prospects, performance and cash flows. The CCB on the other hand states that “Although the CCB’s going concern status is intact for the present, we have registered our urgent need for a nominal operational subsidy for the organization. The supplementary allocation will allow us to amplify our delivery impact” which seems to indicate that the ‘going concern’ status will be reliant on this urgent “nominal operational subsidy.” Further as one of its focus areas for the new financial year, it states that it wants to seriously address the going concern and sustainability challenges once and for all.

5.3.2. Internal control deficiencies

The AG noted the following in this regard:” Leadership did not excise oversight responsibility regarding financial and performance reporting and compliance as well as related internal controls to ensure that the financial statements and annual performance report are free from material misstatements.”

6. OVERVIEW AND ASSESSMENT OF PROGRAMME PERFORMANCE

Non-financial performance

The Annual Report 2019/20 indicates that 19 of the 21 key performance indicators were achieved vs 15 of the 18 key performance indicators in FY 2018/19. The 90.5% success rate was met with spending of 65.24% of the allocation in FY2019/20, while 15 of the 18 targets was met with spending of 89.9% in the previous financial year.

TARGET	FY2019/20	FY2018/19
Total targets set	21	18
Targets achieved	19	15/18
Targets not achieved	2	3/18
Success rate	90.5%	83.33%
Total Budget Spent (%)	65.24% (R5 845 000/R8 958 00)	89.9% (R7 061 000/R7 850 000)

6.1 Programme 1: Administration and Good Corporate Governance

This programme saw a success rate of 87.5% as only one of the eight targets were not met. This against a spending of 66% of the budget (R5 299 000). This programme deals with areas of administration, corporate governance, financial management, human resource management and stakeholder communication.

	FY2019/20	FY2018/19
Programme 1: Targets	8	4
Targets achieved	7/8	4/4
Targets not achieved	1/8	0/4
Success rate	87.5%%	100%
Programme Budget Spent (%)	66% (R5 299/R8 031)	92.3% (R6 534/R7 061)

The missed target relates to the payment of invoices within 30 days and the CCB indicated that as a mitigating strategy, it will ensure that their Finance Section has all controls in place to pay invoices on time.The Committee plans to impress on the CCB the importance of paying invoices on time, especially those of SMME’s given their reliance on on-time payments to ensure the continued existence of their businesses, especially in these times of the Covid-19 pandemic.

6.2 Programme 2: Preservation, Interpretation and Showcasing of the History of the Castle

All three targets of Programme 2 have been achieved against a spending of 64.5% of the budget versus the achievement of 3 of the 4 targets in the previous year at a spending-rate of 43.8%.

	FY2019/20	FY2018/19
Programme 2 targets	3	4
Targets achieved	3/3	3/4
Targets not achieved	0/4	1/4
Success rate	100%	75%
Programme Budget Spent (%)	64.5% (R428 000/R662 0000)	43.8% (R230 000/R525 0000

The CCB should be commended for the performance of this Programme especially as it relates to the preservation and showing of the Castle but it is however noted that number of targets decreased from 4 to 3 between the last two financial years.

6.3 Programme 3: Maximising the Tourist Potential

As with the previous financial year, Programme 3 saw a performance where 5 of the six targets were met. The missed target relates to gross revenue generated per annum. However, while only 5% of the budget has been spent in the previous financial year with a success rate of 83.33%, the year under review saw a 60% utilisation of the allocated budget with the same success rate.

	FY2019/20	FY2018/19
Programme 3 targets	6	6
Targets achieved	5/6	5/6
Targets not achieved	1/6	1/6
Success rate	83.33%	83.33%
Programme Budget Spent	60% (R9 000/R15 000)	5% (R3 000/R60 000)

This Programme saw the Visitor figures to the Castle decreased by 6 702 from the previous year, even though it exceeded the annual target of 170 000, and an engagement on the setting of this target is recommended given the over achievement in the three previous years.The CCB should be complemented for the over-achievement of the Number of commercial events (+4) and film and fashion shoots (+3) at the CGH as these serve as important revenue-generation initiatives.

6.4 Programme 4: Increased Public Profile and Positive Perception Across all Sectors of the Community

Similar to the previous financial year, all 4 APP targets were met, resulting in a success rate of 100%, and the CCB should be lauded for this achievement. The Number of student-learnerships and internships offered per annum has, however, decreased from 26 in FY2017/18 to 15 in FY 2018/19 and to 12 for FY 2019/20.

	FY2019/20	FY2018/19
Programme 4 targets	4	4
Targets achieved	4/4	4/4
Targets not achieved	0/4	0/4
Success rate	100%	100%
Programme Budget Spent (%)	43.6% (R109 000/R250 000)	144% (R294 000/R204 000)

Given the challenges of youth unemployment in the country, the CCB should be encouraged to maximise the learning opportunities for the youth at the CGH through the number of student learnerships offers per annum at the CCB.It is especially the target of “number of heritage-educational programmes for women, unemployed youth, disabled and traditional communities”, that is welcomed, given that it had a target of 12 and overachieved this with 18 more than required.

7. GOVERNANCE

The Annual Report refers to various issues under this section, inter alia its engagements with the Portfolio Committee, that it operates as a Schedule 3A Public Entity, and it states that a Risk Register has been developed to determine the effectiveness of its risk management strategy and to identify new and emerging risks.

7.1 Risk Management

The Annual Report indicates that the CCB has developed a Risk Register, which forms the basis for regular risk assessments to determine the effectiveness of its risk management strategy and to identify new and emerging risks. While the Annual Report for FY2017/18 listed the various Strategic Risks, this was not done for the last two years. These risks included the shortcomings in the Castle Control Board’s founding Act; the safety and security concerns of staff and visitors to the Castle; and finalising the space-allocation, utilisation and sustainability of the Castle Control Board.

7.2 Fraud and corruption

The CCB has a fully-fledged Fraud Prevention Policy that also addressed criminality. It aims to make losses due to fraud and corruption intolerable and will institute training covering these aspects. It states that criminal activities would more likely be internally induced, and feels that the Department’s guidelines in this regard are sufficient to deal with the issue. It further states that in the case of significant corporate functions at the Castle, it sources additional private security that is paid for by the client. The upgrading of the CCTV camera system will further enhance our capability to manage safety and security.

8. HUMAN RESOURCES

As indicated earlier the CCB saw the departure of three managers and two other personnel members during the period under review. It also states that, given the fact that the organisation does not have a dedicated Human Resources Unit, they envisage a complete review of the Human Resources policies and structure of the CCB for the new financial year. It had a team comprising 13 full-time CCB remunerated staff members at the end of FY 2019/20. As in the past FY, they have access to three (3) museum artists, who are remunerated and performance managed by the Department of Defence, and are thus not included in the Human Resources Table. These members are complemented with short-term contract staff, interns (35) and additional casual staff employed to assist during the peak tourism season as well as ten (10) members of the DOD-funded gardening maintenance team. Despite the departure of ten staff members over the past two years, the CCB performed very well against set targets in the year under review. This raises a question whether the current Human Resources structures are aligned with actual needs. Simply put, it seems like the CCB is able to do more with less staff, which should be considered in its future planning as well as its funding requirements.

8.1 Performance rewards

The Annual Report for FY2019/20 indicates that no performance rewards were paid to members of the CCB for the period under review, the second year in a row.This as opposed to the FY2017/18 when the rewards amounted to R386 553and R368 935 in FY2016/17. The CCB should be commended for forfeiting their performance rewards for the second year running, especially given the current financial constraints.

9. COMMITTEE OBSERVATIONS: castle control board

The Portfolio Committee made the following Observations regarding the 2019/20 Annual Report of the CCB:

The Committee noted that although the CCB has received an unqualified audit outcome from the AGSA for the last two financial years, this is a regression from two consecutive clean audits obtained in prior years.
The Committee noted the completion of the Integrated Conservation Management Plan and is encouraged that this will assist to conserve and preserve the Castle of Good Hope in a prime condition.
The Committee again expressed its apprehension around the Going Concern status, as identified by the AGSA, as it undermines the continued sustainability of the CCB.
The CCB’s attempts to achieve a UNESCO World Heritage Site listing was welcomed by the Committee as it would not only be beneficial to the CCB, but also give assurances that the site adheres to international standards.
The Committee noted that the overall decrease in expenditure from 90% in FY2018/19 to 62% in FY2019/20 was largely due to under-expenditure in the Human Resources as it lost 3 managers and two other staff members of a staff complement of 13.
The CCB missed its annual target on the payment of invoices within 30 days and the Committee expressed its concern around the knock-on effect of this, especially on SMME’s.
The Committee noted the remarks by the CCB that the year under review was the first time that the Office of the AGSA audited the entity, as opposed to private intermediaries who performed it in the previous six years.

10. COMMITTEE Recommendations: castle control board

The Portfolio Committee, after considering the 2019/20 Annual Report of the CCB, makes the following recommendations:

The Committee recommends that the CCB should update it on the steps it has taken to address the matters raised by the AGSA.
The CCB is requested to update the Committee on the implementation of the Integrated Conservation Management Plan on a regular basis to ensure that any challenges in this regard are timeously identified and addressed.
The Committee recommends that all efforts should be made to address the Going Concern challenges as identified by the AGSA and that the CCB should appraise the Committee on progress in this regard on a regular basis.
The Committee encouraged the CCB to enhance its efforts to obtain a UNESCO World Heritage Site listing and wants it to brief the Committee on progress in this regard as well as indicating when it expects to achieve this objective.
The Committee recommends that the CCB put control measures in place to retain personnel as the loss of 10 staff members over the last two years is not conducive for productivity and its sustainability. It is also advised to review its Organisational Structure given that it was still able to achieve most of its targets while losing 10 staff members.
The Committee recommends that the internal controls around the payment of invoices within 30 days, should be enhanced to ensure that invoices are paid timeously, and that the CCB should report on the actions taken at the next engagement.
The Committee urged the CCB to address the audit challenges as pointed out by the AGSA, as it should not matter who audits them, in that they have to ensure that their submitted reports meet the expected requirements and standards, especially given that they are a relatively small entity that is operating with a relatively small budget.

Report to be considered

[1] See for instance the Castle Control Board Annual Performance Plan 2019/20. p.19 and CCB’s APP 2019/20, p. 11; and CCB, 2019. Also see section 4.2 of this document.

Documents

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