ATC231027: Budgetary Review and Recommendation Report of the Portfolio Committee on Defence and Military Veterans on the 2022/23 Annual Report of Armscor and the Castle Control Board (CCB), Dated 25 October 2023

Defence and Military Veterans

Budgetary Review and Recommendation Report of the Portfolio Committee on Defence and Military Veterans on the 2022/23 Annual Report of Armscor and the Castle Control Board (CCB), Dated 25 October 2023.

 

The Portfolio Committee on Defence and Military Veterans (PCDMV), having considered the 2022/23 annual reports of the Armaments Corporation of South Africa (ARMSCOR) and the Castle Control Board (CCB), on 11 and 18 October 2023 respectively, reports as follows:

 

1.       INTRODUCTION

 

1.1       Mandate of the Committee

 

The PCDMV 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:

 

1. an assessment of the department’s service delivery performance given available resources;
2. an assessment on the effectiveness and efficiency of departments use and forward allocation of available resource; and
3. 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.

 

PART A: THE ARMAMENTS CORPORATION OF SOUTH AFRICA (ARMSCOR)

 

1.  

 

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):

President Ramaphosa delivered his State of the Nation Address (SONA) on 9 February 2023. As was the case in recent years, no direct reference was made to Armscor, but the president again emphasised local production and procurement. This has relevance to Armscor’s role in the procurement value chain as the primary acquisition agent for the South African National Defence Force (SANDF). The president’s focus on local production also extends to the local defence industry.

 

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 (2019 - 2024)

 

The Governmental MTSF Outcomes, to which the DOD will contribute, is supported by Armscor in the following ways:

 

• MTSF Priority 1: A Capable, ethical and developmental state. Armscor will contribute by ensuring improved governance and accountability through compliance to regulatory frameworks, continuing to fight corruption and fraud through internal control measures, to support other government departments and its people in pursuit of South Africa’s developmental agenda.
• MTSF Priority 2: Economic transformation and job creation. Armscor will contribute through sustainable acquisition of weapons systems and local procurement of goods and services.
• MTSF Priority 3: Education skills and health. Armscor will contribute through the provision of internal and external higher education, skills development opportunities and creating foreign learning opportunities.
• MTSF Priority 4: Consolidating the social wage through reliable and basic services. Armscor will contribute by promoting peaceful and inclusive societies for sustainable development.
• MTSF Priority 6: Social cohesion and saver communities. Armscor will contribute through its contribution to border safeguarding, cooperation with the South African Police Service (SAPS) and support to other Government Departments.
• MTSF Priority 7: A better Africa and a better world. Armscor will contribute by supporting the DOD’s participation in external operations in support of UN and AU peace missions and other regional peace initiatives.

 

3.         2021/22 BRRR RECOMMENDATIONS

 

During the previous BRRR process, the PCDMV identified the following areas for monitoring by the Committee:

 

• Armscor is urged to intensify its commercialisation strategy as a means to limit the impact of decreasing defence funding allocations. Similarly, better cooperation with other government departments are encouraged to ensure that the services of Armscor are more widely recognised and used.
• The Committee recommends ongoing engagement between Armscor, the DOD and National Treasury on the funding of the midlife upgrades of the SA Navy frigates and submarines (also refer to the PCDMV recommendation to the Minister of Finance).
• The DOD, Armscor, Denel and National Treasury are urged to address the need for improved landward defence technology, notably in the SA Army Infantry Formation. A way forward on Phase 2 of Project Hoefyster is required or, in lieu thereof, a way forward on the upgrading of the current Ratel fleet is required (also refer to the PCDMV recommendation to the Minister of Finance).
• The Committee welcomes the fact that maintenance contracts have been put in place for all SA Air Force Aircraft platforms. The Minister of Defence and Armscor Board should, in future, ensure that such contracts are negotiated and renewed well in advance of its expiry dates.
• The Committee recommends the development of an urgent plan of action around the A-Darter missile system, its further production and delivery to the SA Air Force. This is of particular concern, given the statement that the current missiles in use by the SA Air Force is nearing the end of its operational life. A similar recommendation was made in the 2021 PCDMV BRRR, yet little progress has been made.
• The Minister and Armscor Board should ensure that adequate consequence management is in place. The Committee recommends that Consequence Management should be implemented on the most recent cases of irregular, unauthorised, and fruitless and wasteful expenditure and then they should work backwards to older cases. This will ensure that members are held to account before leaving the entity and serve as a deterrent against further such cases.
• Armscor and the DOD are encouraged to work together to ensure that funding is availed for the upgrading of Armscor technologies required for the entity to remain globally competitive.

 

4.         OVERVIEW OF THE 2022/23 ARMSCOR PERFORMANCE

 

As was reported in previous years, Armscor continues to operate under financial pressure, as is the broader defence industry, due to funding constraints in the defence environment. Of particular concern is the declining defence allocation and the misalignment of defence spending towards Compensation of Employees, resulting in limited acquisitions for the SANDF and therefore reducing acquisition work for Armscor over the MTEF. Similarly, reduced funding in the DOD also results in a reduction in maintenance of the SANDF’s primary mission equipment, much of which Armscor is responsible for contract management. These factors complicate contract management and the effective maintenance of prime mission equipment. The situation at Armscor is further complicated by the demise of Denel, since Denel contracts represent a large portion of Armscor's total acquisition portfolio for the DOD. As such, Armscor continuously needs to diversify its income stream to generate additional income.

 

4.1       Acquisitions

 

Acquisitions for the SANDF and other government departments reflect Armscor’s core function, but remain under pressure due to limited funding available to 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 DOD’s Strategic Defence Account (SDA) and system support and procurement (funded by the General Defence Account (GDA)). 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 2022/23 financial year, Armscor managed and executed contracts worth R17.22 billion (an increase from the R12.409 billion in 2021/22), including the following:

 

• Maintenance and support contracts worth R4.091 billion (compared to R3.960 billion in 2021/22).
• Capital acquisition contracts managed worth R13.129 billion (compared to R8.464 billion in 2021/22).

 

The Armscor 2021/22 Annual Report also noted the continued decline of capital projects. Previously, the Armscor Annual Report for 2020/21 noted that the funding allocation for projects on the Special Defence Account (SDA) (Capital Budget) has been continually decreasing over the past four years. Although the capital acquisition portfolio appears to be relatively high, the bulk of this portfolio (R10.402 billion) comprises multi-year Denel orders of which the order values have been accumulating over the past number of years due to non-expenditure on those orders. During the 2022/23 reporting period, there were only eight capital projects with a specific funding allocation for the year. Nonetheless, a total of 22 capital projects were being executed due to funds being carried over from the previous financial year. Only projects that had already been contracted or partially contracted for execution were funded.

 

A number of projects or sub-projects were successfully completed and new capabilities were delivered to, and taken into operation by, the SANDF:

 

Hydrographic vessel procurement (Project Hotel): Construction was set to start in 2018 and 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. The Project has had some delays due to Force Majeure claims related to Covid-19, flooding and civil unrest. At the end of 2022/23, the construction of the Hydrographic Survey Vessel platform and its superstructure had been completed with the exception of the installation of equipment, which is ongoing. All Survey Motor Boats (3 in total that complements the main large Survey Vessel) have been handed over to the SA Navy. Armscor does note, however, that “the main contractor has been experiencing commercial challenges, which are having a negative impact on the programme. In this regard, Armscor has intervened by amending the contract to ease cash-flow management between the main contractor and their sub-contractors.”

 

Inshore Patrol Vessels (IPVs) (Project Biro):  By the end of 2022/23, the status of the three vessels were as follows:

• The delivery of the first vessel took place in May 2022 and has been taken into operation by the SA Navy.
• The construction of the second vessel has been completed and the vessel was launched during the reporting period.
• The keel of the third vessel has been laid and manufacturing of the ship sections is nearing completion.

 

Midlife upgrade of the SA Navy Frigates (as partially funded following from previous PCDMV BRRR recommendations):

The project formally established the Functional Baseline (Defining the operational requirement) during 2021. However, due to the reduction of the capital budget, the project has been suspended. In 2022/23, National Treasury has, consistent with the Committee’s recommendation, allocated the DOD additional funding of R500 million in 2023/24, R441 million in 2024/25 and R480 million in 2025/26 for the midlife upgrades of the South African Navy’s frigates and submarines. These earmarked funds may not be used for any other purposes. The Armscor Annual Report did note that “The current allocation of R1,4 billion is allocated to refit two submarines and one frigate. These projects are managed by the Dockyard.”

 

Airborne systems: Short-range air-to-air missiles: This project entails the development of the A-Darter short-range air-to-air missile, co-funded by the Brazilian Air Force and the SA Air Force. The development phase of the missile system was completed by Denel. A contract was then placed with Denel in March 2015 for the industrialisation and subsequent production of A-Darter missiles, but this has not been achieved due to constraints at Denel. In 2022/23, Armscor launched an initiative to investigate the possible reviving of the project. The Corporation found that it is feasible to complete the industrialisation and production of the missiles to meet the requirement of the SA Air Force. This could be pursued by following a completely different and unique contracting model and with greater participation from the local defence industry. Armscor is currently pursuing the new approach to the project and by the end of the reporting period, Armscor had completed the development of the model to be followed.

 

Ground Based Air Defence System (GBADS): The GBADS for the SA Army was delivered to the Air Defence Artillery Formation in 2020/21 and it provided for the refurbishing of the radar-guided system 35mm guns of the Air Defence Artillery Formation. The second phase of the GBADS consist of two steps. Step 1 includes the upgrade of the Gun Fire Control System of the 35mm Anti-Aircraft guns and was completed in 2021/22. Step 2 includes the inclusion of the Missile Short Range Air Defence system capability but is currently not funded. The third phase of the GBADS programme addresses the Design and Development of the Battle Management, Command and Control, Communications, Computers and Information integration within the Mobile Air Defence System Regiment. The development of this system is currently in process and should be completed with the establishment of a Product Baseline by April 2024.

 

Tactical Communications System: This system will make provision for all tactical communication requirements for all Arms of Service and will ensure interoperability between all users. Industrialisation of the four major sub-systems has been completed. Design Test and Evaluation commenced and all the field testing was completed during October 2021. The 2021/22 Annual Report noted that the Operational Test and Evaluation of the complete system is expected to commence during June 2022 with completion scheduled for July 2022. However, the 2022/23 Annual Report did not provide an update on whether the said progress was made.

 

4.2       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. In 2022/23, similar to the preceding year, Armscor managed 14 such agreements of which 13 relate to defence acquisition projects. Only one of the current DIP agreements are not related to the military (related to a SAPS pistol acquisition project). The value of DIP credits being managed remained similar to the previous financial year and comes to a total of R23.305 billion compared to R23.332 billion in 2021/22. Outstanding DIP obligations are as follows:

 

• DIP agreements related to the Strategic Defence Packages (1): R0
• DIP agreements related to ongoing defence projects (15):                      R407 million
• DIP agreements related to the SAPS (1):                                               R17 million

 

It was previously noted that the main contractor (Denel) for Project Hoefyster experienced financial challenges and as a result, was unable to fully discharge its pending DIP obligation within the specified period. Armscor's Board of Directors subsequently approved that penalties be levied on Denel in terms of the DIP Agreement concluded between the parties.

 

Furthermore, the 2022/23 Annual Report notes that, in relation to Project Hotel and its DIP credits, the non-payment of suppliers by the main contractor (SAS) during the previous financial year, continued to persist during the reporting period. The non-payment of sub-contractors by the main contractor has resulted in significantly lower than planned execution of DIP related activities.

 

4.3       Research and Development

 

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. A continuous challenge for Alkantpan is the lack of support of critical mission equipment by Denel as the Original Equipment Manufacturer due to Denel’s financial situation. Alkantpan is also in need of equipment upgrades, such as the requirement to procure a flight follower to increase its capability and to attract more clients.

 

Following Covid-19, there has been an increase in foreign sales at Alkantpan and the trend is expected to continue, with 16 tests taking place in 2022/23. Alkantpan is also now offering Unmanned Aerial Vehicles (UAV) testing.

 

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 Personal Protective Equipment products, which are sold to the safety industry. In 2022/23, Hazmat encountered a decline in manufacturing output (e.g. mining industry) due to load shedding which resulted in a decrease in the need for Hazmat’s products. This resulted in Hazmat experiencing its first net loss in several years.

 

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. In 2022/23, Gerotek added 2 new climatic chambers and 3 new training vehicles. Memoranda of Agreement were signed with Johannesburg Water, and Gauteng Province Department of Roads and Transport (GPDRT) for advanced driver training.

 

Protechnik Laboratories focuses on chemical and biological defence. Protechnik’s 2022/23 activities included several projects with the South African Military Health Services on chemical detection technology.

 

Ergonomics technologies focuses on integrating ergonomics into the SANDF. The 2022/23 Annual Report highlights include:

• Expanding motion capture and biomechanical modelling capabilities.
• With Flamengro, testing body armour response to blast loading via Digital Imaging Correlation.
• Provided ergonomics inputs towards a boot specification for the South African Special Forces.

 

Flamengro: In 2022/23, Armscor focused on the completion of the 30 x 173 mm medium calibre concept demonstrator for Counter Rocket Artillery and Mortar. Further a design and commissioning of a spin-jig for a pre-fragmented 30 mm projectile fuse testing was achieved, in partnership with Rheinmetall-Denel, Denel Pretoria Metal Pressings and Reutech Solutions. This development has now surpassed technology readiness level 4.

 

Armour Development conducts defensive and reactive armour development and is 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. In 2022/23, Armour Development has received new orders for their Armour Protection Technology and Critical Angle projects. The Critical Angle project is executed in partnership with a Swedish company.

 

The Institute for Maritime Technology (IMT) provides techno-military expertise to support naval decision-making. The IMT indicated a significant concern during 2022/23 in that it had a high number of resignations in key positions that led to 17 vacancies. This may impact on the IMT’s ability to deliver services, especially if it has an exodus of highly skilled individuals. Furthermore, previous Annual Reports referred to the successful development of the Ultrasonic Broken Rail Detector, which has significant commercial potential. Previous Annual Reports noted that the system was tested in India, but no further mention has since been made regarding any successful international sales. Transnet Freight Rail is one of the current clients utilising the system.

 

The Intellectual Property Management Division (IPMAD): Intellectual Property (IP) created or acquired during acquisition of defence matériel or technology development projects, on behalf of the DOD, is managed by the Intellectual Property Management division (IPMAD). One Armscor IP/technology was exploited in the 2022/23 financial year.

 

4.4       The Armscor Dockyard

 

The Armscor Dockyard serves as the primary maintenance supplier to the SA Navy. The Armscor Dockyard’s performance is based on a service level agreement between the SA Navy and Armscor.

 

In 2022/23, the Armscor notes that “Capital renewal and equipment upgrades were managed on an ongoing basis, where old and redundant equipment were disposed of and replaced with newer technologies, putting Dockyard at the forefront of the latest technologies. Maintenance of facilities such as the dry-dock, cranes, and synchro lift was also prioritised in terms of procurement and execution.”

 

Updates on the maintenance of specific classes of vessels include:

 

Submarines:

• SAS Charlotte Maxeke: The refit is in full swing as the overhaul phase is being concluded.
• SAS Manthathisi: Planned maintenance DED was completed and the boat undocked in December 2022. The boat passed post-maintenance trials and is ready to sail.

 

Infrastructure upkeep:

• The divisions provided 100% of ancillary services to the SA Navy. The power generation has taken a strain due to Eskom load shedding disruptions. The Durban synchro lift is operational with limited capacity.

 

On 13 September 2023, the PCDMV conducted a visit to the Armscor Dockyard. During the visit, Armscor noted the challenges and mitigations reflected in the table on the next page in terms of the Dockyard. Following the visit to the Dockyard, the Committee made the following recommendation: While the Committee is aware of the funding constraints that the Dockyard is subjected to, the Committee recommends that the Entity prioritises the rejuvenation of its building infrastructure utilising funding made available by Armscor and the DOD. In addition, thereto, the Committee recommended that the Dockyard makes use of available commercial opportunities with the SA Navy taking priority.

 

5.         HUMAN CAPITAL MANAGEMENT

 

At the end of 2022/23, Armscor, including the Armscor Dockyard, had a staff complement of 1 374, which is in line with the previous financial year (1 375).

 

In terms of Employment Equity, 88.06% of the Armscor Human Resources contingent is African, Coloured and Indian, which is an increase from 87.05% in 2021/22 (and 83.48% in 2020/21). The 2022/23 Annual Report further indicates that 40.76% of employees are female, which also represents an increase from the 40.0% in the preceding year. Armscor’s Employment Equity Plan’s target for ‘black representation’ as well as female representation has accordingly been achieved. Furthermore, Armscor’s business is centred within the following occupations: Science, Engineering, Technical and Technical Support and the total number of employees within this category is currently 49,13%

 

In terms of the Human Resources turnover rate, the corporate target for controllable staff turnover in technical positions, excluding retirements, should be less than or equal to 4%. However, turnover in technical functions significantly exceeded this:

 

• Science – 16,67%
• Engineering – 5,67%
• Technical – 3,12%.

 

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. Armscor sponsored 38 students with bursaries to study at different institutions, of which the majority were in engineering and science. This is higher than the 29 bursaries reported in the previous financial year.
• Defence Engineering and Science University Programme (DESUP). The number of DESUP students for 2021/22 was not indicated in the 2022/23 Annual Report.
• Talent Development Programme. For 2022/23, 32 candidates participated in this programme, which is slightly higher than the 31 who participated in the preceding year.

 

6.         PERFORMANCE OVERVIEW

 

Armscor has two categories of performance measurement namely:

• Performance against the Service Level Agreement Outputs. (10 of 14 targets set for 2022/23 achieved [71.42% targets achieved]).
• Performance against Group Strategic Outputs. (17 of 21 targets set for 2022/23 achieved [80.95% targets achieved].

 

The table below highlights the targets not achieved or only partially achieved.

 

Selected Key Performance Indicators not achieved/partially achieved by Armscor in 2022/23

Objective	KPI	Goal	Achievement	Comments
Performance against the Service Level Agreement Outputs
Acquisitions and procurement	Percentage of DOD system support and procurement requirements converted into orders placed.	95%	90.03%	Target not achieved DOD requirements to the value of R997,30m were received. Armscor committed R978,77m of the above mentioned funds resulting in an achievement of 90,03%.
Defence Industrial Participation (DIP)	Value of DIP credits to be granted to overseas suppliers.	R111.31 million	R23.62 million	Target not achieved
Defence Technology, Research, test and evaluation requirements for the DOD	Percentage of execution of technology requirements.	95%	51.68%	Target not achieved The performance was due mainly to the orders on the R&D divisions being placed late in the Financial Year (2022/23). As a result, there was insufficient time for the R&D Divisions to execute all the contracted work and invoice within the 2022/23 financial year.
Dockyard	Percentage of compliance to project finance.	90%	75%	Target not achieved This resulted from non-spending of the special project FA approved in October 2022. (Target also not achieved in the previous financial year)
Performance against Group Strategic Outputs
Infrastructure renewal	Appoint an Enterprise Resource Planning Service Provider	31 May 2023	-	Target not achieved The due date for order placement was not achieved. The ERP Request for Bid (RFB) was advertised on 17 March 2023 and is now closed. Delay due to Supreme Court decision about procurement regulations.
Infrastructure renewal	Implementation of the approved application system renewal plan.	80%	0%	Target not achieved The implementation of the ERP is dependent on the successful appointment of the ERP service provider. (Target was also not achieved in three previous years)
Stakeholder engagement	Stakeholder Survey (conducted every second year).	1% improvement	0.1% decline	Target not achieved Stakeholders’ satisfaction is rated 7,2. for the 2022/23 financial year. This is 0,1% decline as compared to the 7,3 of 2020/21 financial year.
Transformation of corporation	Controllable staff turnover in technical positions, excluding retirements (less than or equal to 4%).	<4%	4.66%	Target not achieved There were 25 (out of 536 technical positions) resignations during the reporting period.

 

 

 

 

7.         FINANCIAL STATEMENTS AND KEY NOTES FROM THE AUDITOR-GENERAL

 

The total comprehensive income of the Group continued to decrease in recent years, as follows:

 

• 2019/20: A surplus of R179.5 million
• 2020/21: A surplus of R124.3 million
• 2021/22: A surplus of R4.6 million
• 2022/23:  A surplus of R167.98 million

 

Revenue generated is largely dependent on a state grant, but comprises the following categories in the table below. The table reflects the decrease in income from the sale of goods and services as well as a decreased income on interest and other income. 

 

Revenue category	2020/21	2021/22	2022/23
Sale of goods and services	R301.8 million	R268.8 million	R276.4 million
Government grants	R1.113 billion	R1.257 billion	R1.270 billion
Interest	R89.1 million	R86.2 million	R126.3 million
Rental	R71.4 million	R62.7 million	R59.1 million
Other income	R15.1 million	R21.0 million	R21.6 million

 

The following additional financial matters should also be noted:

 

• Employee-related costs decreased from R1.2 billion in 2021/22 to R1.06 billion in 2022/23.
• Investments in joint ventures increased from no allocation in 2021/22 to R6.235 million in 2022/23.
• Payables from non-exchange transactions increased from R48.7 million in 2021/22 to R184.3 million in 2022/23.
• Sale of goods and services decreased from R53.7 million in 2021/22 to R23.9 million in 2022/23.
• Debt impairment losses increased from R7.7 million in 2021/22 to R44.0 million in 2022/23.

 

Payment to the executive directors:

• Payment to the executive director positions (CEO and CFO) increased from R8.255 million in 2021/22 to R9.015 million in 2022/23 (a 9.6% increase).
• The main contributor to the increased payment to executive directors relates to an increased payment for ‘other benefits’ from R1.387 million in 2021/22 to R1.816 million in 2022/23. Note: ‘Other benefits’ include bonus (13th cheque), performance related payments and leave capitalisation.’
• The largest contributor was the increase in ‘other benefits’ for the CEO that increased from R898 000 in 2021/22 to R1.210 million in 2022/23.

 

Payment to non-executive directors:

• Fees and Committee remuneration to non-executive directors decreased from
  R4.231 million in 2021/22 to R3.995 million in 2022/23.

 

Payment to executive committee members:

• Payment to executive committee members increased from R17.6 million in 2021/22 to R23.4 million in 2022/23. The number of executive committee members increased from six in 2021/22 to eight in 2022/23.

 

 

 

 

Fruitless, wasteful and irregular expenditure

 

In 2022/23, fruitless expenditure amounting to R353 000 was incurred, which is much lower than the R13.4 million incurred in 2021/22. The closing balance for fruitless expenditure by the end of the financial year, and taking into account the previous financial year, was R13.7 million.

 

Irregular expenditure of R27.5 million was incurred in 2022/23, which is higher than the R17.5 million in 2021/22.

 

In terms of Consequence Management, Armscor notes:

• A criminal case against officials with regards to fraudulent procurement processes that were under assessment in the previous year is in process with the Military Police and Director Public Prosecution Provincial.
• Disciplinary action was taken against six officials for irregular and fruitless expenditure incurred due to non-compliance to procurement regulations and losses suffered by the company. Three of the officials were dismissed whilst two resigned from the company. The disciplinary matter for one official is in progress.

 

Findings of the Auditor-General of South Africa (AGSA)

 

As in the previous year, Armscor obtained an unqualified audit from the Auditor-General of South Africa (AGSA) for 2022/23.

 

The AGSA made four notes in its Armscor audit that may require improvement on the side of the entity in future:

 

• Effective and appropriate steps were not taken to prevent irregular expenditure as required by section 51(1)(b)(ii) of the PFMA. The majority of the repeat irregular expenditure was caused by awarding of quotations that did not indicate the stipulated minimum threshold for local production and content.
• Effective and appropriate steps were not taken to collect all revenue due, as required by section 51(1)(b)(i) of the PFMA.
• Bid documentation for procurement of commodities designated for local content and production did not stipulate the minimum threshold for local production
• Senior management did not exercise sufficient oversight responsibility over performance reporting. This was mainly a result of insufficient reviews by management combined with system-imposed limitations linked to the legacy systems used to compile the performance report. This resulted in a material adjustment to the annual performance report.

 

The Military Police Unit is investigating allegations of procurement irregularities at the Dockyard division. These investigations were still in progress at the date of this report.

 

8.         COMMITTEE OBSERVATIONS: ARMSCOR

 

The Committee made the following general observations on the 2022/23 Armscor Annual Report:

 

1. The Committee’s main observation and discussion point revolved around the fact that the high levels of achievement by Armscor in contract placement and managing do not reflect in the reality on the ground. In specific relation to the SA Air Force and SA Navy capabilities, it is evident that flying hours and sea hours are drastically decreasing, yet Armscor achieved most of its targets related to contract management. The Committee therefore questioned the value for money derived from these maintenance contracts as delivery does not seem to equate to actual operational equipment. Members noted that there is thus clearly a need for a results-based model in relation to the work of Armscor and the DOD.
2. The Committee noted the ongoing need for the refits of SA Air Force and SA Navy prime mission equipment. Armscor informed the Committee that fiscal constraints remain a major hindrance to such programmes. For example, Armscor noted that one of the SA Air Force aircraft types for which Denel is responsible, they now received the same allocation as in 2007, which clearly means that high level of maintenance cannot be afforded.
3. The Committee welcomed Armscor’s indication of its quick response to place the contracts for the maintenance of the Frigates and Submarines between July and October 2023 following National Treasury’s provision of additional funds as a result of the PCDMV’s intervention.
4. The Committee expressed its concern that there are currently no support contracts in place for the Oryx and Rooivalk helicopters, but noted that new contracts are set for late in 2023.
5. Members requested further details on the full payment of board members, inclusive of all costs to Armscor.
6. The Committee noted progress in recent months regarding decisions on Project Hoefyster, but questioned how many actual vehicles will be delivered under the new plans. Members also noted that even if Project Hoefyster, in its scaled-down format, were to be completed, it does not negate the need for the Ratel Fleet to be maintained and modernised.

 

9.         COMMITTEE Recommendations

 

Based on its analysis and overview of the 2022/23 Armscor Annual Report and other oversight activities, the Committee makes the following recommendations:

 

Recommendation to the Auditor-General of South Africa:

 

1. The Committee remains concerned about the effectiveness of the entire prime-mission equipment repair and maintenance value-chain, whether value for money is derived, and whether current contracting systems allow for optimal efficiency in a military environment where multi-year maintenance and repair contracts are required. The Committee recommends that the AGSA’s office should provide insights and should consider conducting a performance audit in relation to the repair and maintenance selected contracts of the SA Air Force as well as Project Hoefyster managed by Armscor and executed by the SANDF. The selection of SA Air Force contracts should reflect both maintenance contracts with Denel as well as external service providers. The AGSA is advised to make use of auditors with the necessary understanding of this complex military environment. The AGSA should report back to the PCDMV in 2024 on its findings and specifically on (1) whether value for money is derived, (2) findings on the mismatch between contract management achievement and actual prime-mission equipment availability, (3) whether current contracting systems allow for optimal efficiency in a military environment where multi-year maintenance and repair contracts are required and (4) proposed recommendations to improve efficiencies that will ensure prime-mission equipment readiness. The AGSA should indicate to the Committee in writing by 22 November 2023 what the process will be and when it can expect feedback from the AGSA’s office.

 

1. The Committee reminds the AGSA to ensure continuous engagements with the internal auditing divisions of the DOD and defence entities as a means of providing support towards improved audit outcomes.

 

Recommendations to the Minister of Defence and Armscor Board:

 

1. The Committee noted that the Defence Industry Lekgotla which the Minister planned has not taken place as yet. The Committee urges the Minister to prioritise this engagement with the industry and also liaise with the PCDMV to form part of deliberations.
2. The Committee wishes to thank the current Armscor Board for its continuous engagement with and support to the Committee throughout its term in office.
3. The Committee encourages the Minister to prioritise the appointment of the new Armscor Board, given that the term of the current Board comes to an end in November 2023. The Minister is also urged to note the Committee’s sentiment that Armscor should be proficient in both effectively supporting the DOD, as required by the Armaments Corporation of South Africa Act (No 51 of 2003), as well as pursuing commercial opportunities to ensure its sustainability. It is the Committee’s wish that the Board’s composition and expertise should reflect this dual requirement and that the support to the DOD not be neglected.
4. The Committee noted that, in the 2022/23 financial year, Armscor managed and executed contracts worth R17.22 billion. Armscor should provide the Committee with a breakdown of the value per contract (maintenance and capital acquisition), as of October 2023. The details and value of the contracts should be provided to the Committee by 22 November 2023.
5. Armscor should report to the Committee whether new contracts have been negotiated for the Oryx and Rooivalk helicopter fleet. The details and value of the contract should be provided to the Committee by 22 November 2023.
6. Armscor should provide the Committee with a further written update on the status of Project Hoefyster, including the proposed fleet size to be produced under Phase 2 of the project, following Denel’s costing of Phase 2 which should be finalised by December 2023. The written feedback should be provided to the Committee by 31 January 2024.
7. Armscor should provide the Committee with a breakdown of all costs related to the full payment of Board members, including additional benefits such as travel and other allowance not reflected in the Annual Report.
8. Armscor is urged to ensure, thorough proactive planning with the DOD, that in future, maintenance contracts are negotiated and ready for implementation by the time existing contracts come to an end.

 

 

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 following:

 

• An overview and Assessment of Financial Performance with specific reference to the appropriation statement for the 2022/23 financial year; financial statements; and findings of the Auditor General of South Africa (AGSA).
• An overview and Assessment of Programme Performance focusing on the four Programmes.
• CCB Governance and Human Resources.
• Committee observations and recommendations.

 

1. STRATEGIC PRIORITIES OF GOVERNMENT AND THE CCB.

 

For the last three years, the CCB’s annual reports did not make any reference to the NDP and the only reference to the MTSF is by the Auditor General, in the previous financial year. The Annual Report for 2021/22 referred to the MTSF and states that “One of the most significant impacts of the virus was the climate of uncertainty it created. Although most of the COVID 19 restrictions were lifted in June 2022, the MTEF and the MTSF cycles will have to be adjusted to provide for the aftereffects of this unprecedented, global event.” This trend continued in the 2022/23 Annual Report of the CCB which highlighted the lingering impact of the pandemic on tourism in South Africa, including the Castle.

 

The 2022/23 Annual Report of the CCB referred to its Strategic Outcome oriented goals per programme as follows:

 

• Administration: The programme ensures clean, sound administration and good corporate governance.
• Maintenance and Conservation at the CGH: The intended outcome of this programme is to ensure the proper maintenance, preservation, interpretation and showcasing of the history of the CGH.
• Maximising the Castle’s tourism potential: The intended outcome of this programme is to optimise the tourism and revenue generation potential of the CGH.
• Increase Public Access to the CGH: This program’s intended outcome is to optimize public access and increase the CGH’s public profile and positive perception across all community sectors.

 

The CCB Chairperson, Lt Gen XB Ndlovu, notes the following strategic risks/opportunities to the CCB:

 

• The need to recover from the impact that Covid-19 had on the tourism industry and the related impact on revenue for the CCB. The key to overcoming this challenge is the aggressive marketing and promotion of the Castle.
• Securing the perimeter fence has become imperative if it wants to position the Castle as a UNESCO World Heritage site.
• The use of technology to cost-effectively maintain, enhance, and promote the Castle of Good Hope’s built and intangible heritage. A Memorandum of Understanding with SITA assists in this regard.
• The Board commits to again attain a clean audit (this after the CCB failed to obtain a clean audit in 2022/23).

 

3.         Summary of previous recommendations of the Committee

 

The Portfolio Committee, after considering the 2021/22 Annual Report of the CCB, made the following recommendations:

 

1. The Committee expressed it expectation that the CCB should continue to receive a clean audit opinion and reiterated its stance that it expects such a small entity to perform well during its auditing processes.
2. The Committee recommends that the DOD continue to second Regional Works Regiment artisans to the CCB, as they are making a substantial contribution to the maintenance and repair work at this 367-year-old building.
3. The Committee encourages the CCB to continue to create employment opportunities for both the contract         workers and interns to assist with addressing the huge challenge of unemployment in the country.
4. The Committee commended all DOD role-players for its support to the CCB and encourages them to continue to support the CCB.
5. The Committee recommends that the CCB provides it with the reasons why some managers left, whether it was due to environmental factors and whether it has a retention strategy to ensure the continued employment of its personnel.
6. The Committee recommends that the CCB enhances efforts to increase the number of visitors to pre-Covid levels, and agreed that the increased spending on this item should assist in this regard.
7. Noting the Going Concern challenges have been exacerbated by the pandemic, the Committee recommends that the CCB should, inter alia, explore the full utilisation of all facilities at the Castle to enhance its sustainability and revenue generating abilities.

 

 

4.         OVERVIEW AND ASSESSMENT OF FINANCIAL PERFORMANCE

 

4.1       Financial performance for 2022/23

 

As in the previous financial year (2021/22), the CCB recorded significant underspending in the 2022/23 financial year. The under-expenditure of R1.646 million for 2022/23 (R2.7 million in 2021/22) may at first seem like a saving, but it has to be viewed against the background of the R6 million financial support from the DOD. It can therefore be questioned whether the financial assistance should not be decreased permanently.

 

Table 1: Budget for FY2020/21 to FY2022/23

	2020/21		2021/22		2022/23
	R’000 (R thousand)
	Budget	Budget	Budget	Actual Expenditure	Budget	Actual Expenditure	(Over)/Under Expenditure
Administration	4 711	4 711	8 450	6 203	8 957	7 441	1 516
Preservation and protection	304	304	660	438	700	639	61
Tourism Promotion	0 0 0	0 0 0	85	5	90	22	68
Increased public profile	150	150	243	65	258	257	1
Total	5 165	5 165	9 438	6 756	10 005	8 359	1 646

 

As noted by the CCB Chairperson, there is also a need for the Castle to focus on increasing its revenue generation. This will enable the Castle to, once again, become self-sufficient as in the past where it did not require funding from the DOD. Table 2 below highlights the revenue generation of the Castle over the past 3 financial years. Noteworthy is the increase in financial assistance from the DOD from R5.5 million in 2021/22 to R6.0 million in 2022/23.

Table 2: Revenue FY 2020/21 - 2022/23

Source of revenue	2020/21		2021/22		2022/23
	Estimate	Amount collected	Estimate	Amount collected	Estimate	Amount collected
Sales	1 100	475	2 586	1 075	2 559	2 507
Rental income	1 056	255,4	1 100	2 100	1 212	1 910
Other income	9	555,2	102	46	74	441
Interest income	0	34,4	150	107	160	293
Grant	3 000	4 900	5 500	5 500	6 000	6 000
TOTAL	5 165	6 220	9 438	8 828	10 005	11 151

 

The CCB Strategic Outlook highlights the importance of revenue generation for the CCB. The CCB noted that “we have a small, operational Gift Shop run by a disabled staff member. We started to promote the state-of-art Conference Centre to generate income. We appointed a new Restaurateur in December 2022, promising to deliver an excellent service to our clients who can spend in other areas too. The focus is on high-yield commercial events for the site, thereby supporting the objectives of Project Koba-Tlala.”

 

4.2       Findings of the Auditor-General of South Africa

 

The Castle did not receive a clean audit in 2022/23 (as it has managed to do in the past), but received an Unqualified Audit with findings from the Auditor-General of South Africa (AGSA).

 

The AGSA selected aspects of Programme 2 – maintenance and conservation at Castle Control Board, Programme 3 – maximising the castle’s tourism potential and Programme 4 – increase public access to the Castle of Good Hope for its audit. The AGSA draws the attention of Parliament to the following matters:

 

• The AGSA identified material misstatements in the annual performance report submitted for auditing. These material misstatements were in the reported performance information for Programme 3.
• Some of the quotations were accepted from prospective suppliers who did not submit a declaration on whether they are employed by the state or connected to any person employed by the state, as required by Treasury Regulation 16A8.4 and paragraph 7.2 of National Treasury Instruction 03 of 2021/2022.
• Some of the quotations were awarded to suppliers whose tax matters had not been declared by the South African Revenue Services to be in order.
• Management did not to ensure that the appropriate legislation was applied to ensure that a supplier’s tax status is verified at the time of the award and suppliers declare their interest.

 

  5.          OVERVIEW AND ASSESSMENT OF PROGRAMME PERFORMANCE

 

The CCB set a number of targets in its Annual Performance Plan (APP) for 2022/23 for its various programmes. The sections below provide an overview of performance focus areas, specifically where targets were not met.

 

Programme 1: Administration

 

The CCB achieved most of its targets for Programme 1 (Administration), excluding the target to reduce irregular expenditure as there was an increase in irregular expenditure for the year under review. Achieved targets for the programme include the following:

• Four policies approved (Gift Policy; Asset Management Policy; SCM Policy; Delegations).
• 70% reduction in the number of audit findings.
• Annual Performance Plan (APP) submitted in February 2022.
• Annual Report submitted timeously.
• The CCB’s four Quarterly Reports were submitted on the DPME system.
• CCB CEO performance agreement submitted to the Board for approval.
• CCB Members’ performance agreements submitted.
• Submission of all reports and attendance of committee meetings in support of parliamentary activities.
• The CCB did not incur fruitless and wasteful expenditure.

 

Programme 2: Maintenance and conservation of the Castle

 

The CCB achieved all its targets for Programme 2, including the following:

• 59 preventative and regulation maintenance projects completed.
• Four tangible heritage projects implemented.
• 64 non-commercial cultural events hosted.
• Seven exhibitions hosted.

 

Programme 3: Maximising the Castle’s tourism potential

 

The CCB achieved four of the six targets set for Programme 3. Achieved targets included:

• Generating R10 million through tourism events against a target of R8.829 million (including the DOD grant).
• 42 Film and fashion shoots at the Castle.
• One tourism infrastructure upgrade.
• Two joint marketing initiatives undertaken

 

Targets that were not achieved in Programme 3 include the following:

• The Annual Number of visitors were 73 765 against a target of 120 000.
• 18 Commercial events were held at the Castle against a target of 20.

 

In relation to Programme 3, the AGSA identified material misstatements in the annual performance report submitted for auditing for Programme 3. This may imply that more targets were not achieved and the CCB should be questioned on the AGSA’s findings and the impact on performance in Programme 3.

 

Programme 4: Increased public access to the Castle

 

The CCB achieved all four targets set for Programme 4 which included the following:

• Reaching 1.8 billion number of potential visitors reached through the media.
• The Castle hosted 18 student interns.
• The Castle hosted 19 heritage educational programmes organised for women, unemployed youth, disabled and traditional communities.
• The Castle hosted 14 heritage programmes organised for Military Veterans.

 

6.         HUMAN RESOURCES

 

The CCB’s 2022/23 Annual Report starts with the exact same summary of its Human Resources concern as in the previous Annual Report (2021/22). The two Annual Reports note that “Traditionally the Human Resources component of the CCB has been both its Achilles heel and strength. On the one hand, its historical reliance on DOD-remunerated staff assigned to the Castle has led to significant savings …but on the other hand, it attracted the ire of [National Treasury] and the AGSA and delayed any decisiveness as to the ultimate civilian management structure of the CCB.” It stated further in both reports that the CCB has now successfully resolved this matter but has been put on the back foot with the departure of three managers and two other staff members.

 

By the end of 2022/23, the CCB Management team included 26 full-time CCB-remunerated staff members, which is a decrease from the 28 full-time employees in the previous year. The reduction in personnel was at the semi-skilled and unskilled level. There are currently two vacancies at the senior management level, which remain from the previous year.

 

During 2022/23, no performance rewards were paid. Training costs for the year amounted to R5 695.00 for eight employees. In terms of labour relations, one verbal warning and eight written warnings were issued to staff. 

 

7.         COMMITTEE OBSERVATIONS: castle control board

 

The Portfolio Committee made the following Observations on the 2022/23 Annual Report of the CCB:

 

1. The Committee expressed its concern that the CCB failed to maintain a clean audit outcome from the AGSA as it has done in previous years.
2. Members again raised the ongoing matter relating to the security of tourists at the Castle and highlighted the need for fencing and other security measures to be enhanced.
3. Related to the security matter, the Committee again expressed the need for all relevant parties and stakeholders to resolve the matter of informal dwellings being constructed next to the Castle. The Committee was informed that it is established that the area occupied belongs to the Department of Public Works and Infrastructure and that further steps are being taken to address the matter.
4. The Committee welcomed the increased number of tourists visiting the Castle, but also noted that this is still not aligned with pre-Covid levels and further efforts will have to be made to increase the number of visitors to the Castle.
5. The Committee highlighted the need for continuous maintenance of the buildings that form part of the Castle Complex.
6. The Committee noted the increased allocation from the DOD to the CCB for 2022/23 and, given the underspending of the Castle, questioned whether this should not be lowered.
7. The Committee noted comments made by the CCB that the issue around Reserve Force guards for the Castle has largely been resolved.

 

8.         COMMITTEE Recommendations: castle control board

 

The Portfolio Committee, after considering the 2022/23 Annual Report of the CCB, makes the following recommendations:

 

1. The Committee recommends that the CCB urgently put in place the necessary measures to ensure that it once again achieves a clean audit in 2023/24.
2. The Committee recommends that the CCB reconsider its current approach to attracting tourists as it has not been able to recover from lost market share since the Covid-19 pandemic. The Committee specifically notes the limited spending on marketing and urges the CCB to ensure that it implements an active strategy to attract more foreign and domestic tourists.
3. The Committee recommends further engagements between the CCB, the Department of Public Works and Infrastructure and the City of Cape Town regarding the informal settlers that occupy an area adjacent to the Castle. The CCB should provide the Committee with written feedback on progress in this regard by 22 November 2023.
4. The Committee recommends that the CCB decreases its reliance on the transfer (grant) from the DOD and once-again become self-reliant. To this extent, the Committee notes observations made by the CHG CEO that the transfer will be decreased over time. The CCB should provide the Committee with a written plan, by 22 November 2023, of the reduction in DOD transfers over the MTEF and how it envisages that it will fill the fiscal gap.

 

Report to be considered.