HR Action Plan & measures to contain budget over expenditure; Audit Action Plan; PPE Expenditure Audit

Meeting report

Research paper on DoD’s compensation expenditure

Dr Wilhelm Janse van Rensburg, Parliamentary Researcher, presented to the Committee a research paper on the Department of Defence’s (DoD’s) expenditure on the compensation of employees (CoE). 

The research was done against the backdrop of the adjusted budget delivered by the Minister of Finance on 28 October 2020. The research paper also highlighted critical and relevant sections of the Budgetary Review and Recommendation Report (BRRR). It also highlighted several discussion points related to Human Resources that the Joint Standing Committee on Defence (JSCD) felt would be better addressed during the Portfolio Committee on Defence and Military Veterans’ (PCDMV’s) engagement with the South African National Defence Force’s (SANDF’s) Chief of Human Resources.

During a briefing to the PCDMV on 26 August 2020 on expenditure on the compensation of employees, the DoD had noted that “the human resources component will eventually consume all resources required by the DoD to execute its mandate. This is largely due to consistent budget cuts and the capping of the compensation of employees ceiling below the existing strength, compelling the Department to source additional funding from the operating portion of the budget.”

At the JSCD Lekgotla with the DoD on 17 October 2020, various discussion points focused on addressing CoE expenditure were tabled. Amongst these were the following:

• Force rejuvenation - Implementation of early retirement without penalties;

• Force rejuvenation: Addressing supernumeraries in the SANDF structure;

• Force rejuvenation - Implementation of a mobility exit mechanism (MEM) without affecting force requirements and losing scarce skills; and 

• Reducing long-term suspensions with pay.

(See presentation for more details).

Initiatives to reduce HR costs

Ms Gladys Sonto Kudjoe, Secretary of Defence, SANDF, made some opening remarks and invited Vice Admiral Asiel Kubu, Chief Human Resource, SANDF, to present on the DoD’s initiatives to reduce the HR cost pressures on the CoE shortfall in the Department of Defence for the 2021 medium term expenditure framework (MTEF). 

Admiral Kubu first briefed the Committee on the DoDs financial background in relation to the compensation of employees.  In the past, there had been underfunding of the CoE budget. This was going to continue, and even increase, as the economic outlook for South Africa declined and greater emphasis was placed on a headcount reduction to save on HR costs. The CoE budget for the 2020/21 financial year was projected to have been short by R1.9 billion. The shortfall was projected to increase to over R4 billion in the next four financial years. For this reason, there was a need for stringent interventions to address the shortfall. 

The DoD’s planned interventions to take effect from 1 April 2021 were:

• Downsize the Departmental strength from 75 000 to an average of 73 000 a year;

• Alternate calendar year Military Skills Development System (MSDS) intakes;

• Re-activate exit strategies.

The above strategies had the potential to decrease the shortfall for the 2021/22 financial year from R4.39 billion to R2.842 billion.

(See presentation for more details).

Discussion

Mr S Marais (DA) said it was concerning that the SANDF was not addressing the increased cost of employees with a sense of urgency. The matter had been carried forward from the fifth parliamentary term, and the SANDF had not yet interacted with the National Treasury and the Development Bank of South Africa (DBSA). 

There was need for a holistic approach to the CoE issue. The presentation had looked only at SANDF’s past and current cost of employees. It had not touched on the projected future costs, and its cost management plans. For that reason, the presentation was not good and left no guarantees that the National Treasury would assist. 

Ms M Modise (ANC) said it was saddening that instead of looking at measures to strengthen the country’s defence forces, the SANDF was being forced to look at measures to weaken them. It appeared as if the downsizing of the military forces was focused only on uniformed members or forces. What about the civilian personnel present in the defence forces? Was it possible that the MSDS intakes would affect the rejuvenation strategy that had been presented a few months back?

Department’s response

On whether the SANDF was treating the matter to do with the increased cost of employees with a great sense of urgency, Ms Kudjoe responded that the DoD had already engaged the National Treasury. Due to the economic hardships that the country was going through, the Treasury had indicated that in the next three years it would cut R15 billion from the SANDF budget. In the past three years, it had already cut R18 billion from the budget. For these reasons, the SANDF had moved away from a strength of 75 000, to 73 000.

She confirmed that the SANDF had adopted a holistic approach to its increased cost of employees. It was revising its targets and looking at ways to fulfil its constitutional mandate with limited resources.

Admiral Kubu added that the interventions that it had in place worked in tandem. The exit mechanism that the SANDF had in place had saved money since it had started with people at the bottom notch, and not at the top notch.

The SANDF looked to save R1.5 billion each financial year. This meant that in the next three years, it would have saved R3.5 billion. It had discussed these plans with the Military Command Council. 

On the downsizing of forces, the SANDF was focusing on both the uniformed and civilian colleagues.

On whether the MSDS programme had had an impact on the rejuvenation strategy, Ms Kudjoe replied that the rejuvenation strategy required a strong budget. For that reason, the SANDF planned to recruit people in the MSDS programme once every three years. 

Admiral Kubu commented that this had an impact on the MSDS programme. However, the goal was to save money until the SANDF had a stable financial position. 

The Chairperson appreciated the responses, and commented that the presentation was a first step to dealing with the problems the SANDF was facing. The organisation was dealing with problems that required solutions which had an impact on people’s livelihoods. For this reason, resolving the problems was not going to be a smooth process.

DoD’s 2019/2020 audit action plan

Mr Eric Sokhela, Chief Financial Officer (CFO), DoD, said that for the 2019/20financial year, the Department had received a qualified audit opinion relating to the goods and services and investments within the Special Defence Account (SDA), and irregular expenditure.

On the goods and services and investments within the SDA, the CFO explained that the qualification had to do with the fact that the auditors had had limited access to audit evidence due to the sensitive nature of the account. To avoid future audit opinions based on the same grounds, discussions were being held within the Portfolio Committee on Intelligence on how to manage the possible risk of completeness and accuracy within the covert space, which included Crime Intelligence and State Security.

On irregular expenditure, the AGSA had indicated the DoD did not have adequate systems to identify, detect and record irregular expenditure. The Department had incurred irregular expenditure of R2.8 billion. Included in this was the underfunding of the CoE valued at R2.6 billion.

To address the CoE shortfall, the DoD had held numerous discussions with the National Treasury. 

To address the irregular expenditure, the internal audit division, the Inspector General and the Military Police, were investigating the circumstances surrounding the incurrence of irregularities, and recommendations were going to be made for implementation. In addition, there were processes in place to see how anomalies -- including those relating to procurement -- could be streamlined and improved. For example, the DoD had created a Governance Risk and Compliance Accountability Committee for procurement, whose functions included training and education of procurement practitioners to ensure they understood the supply chain management (SCM) prescripts and legislation and applied them consistently. The DoD had also resolved to enhance consequence management and remove serial offenders from procurement posts.

On asset management, the CFO told the Committee that over the previous financial years, the Department had been qualified on various categories of assets. In order to address the qualification issues and reduce the recurring findings by the Auditor General of South Africa (AGSA), the DoD had resolved to establish an asset management structure and write a position paper, defining its position as far as capital components were concerned.

(See presentation for more details).

Discussion

Ms A Beukes (ANC) asked whether the DoD had a monitoring and evaluation system for its audit action plan. Which division of the Department had ownership of the plan? In the previous report, the DoD had reported on the training of procurement practitioners. The DoD had once again reported the training of procurement practitioners. What was the assessment measure of the training? What was the status of the asset management policy, and were the asset registers updated? Previously, the DoD had reported having an internal oversight committee responsible for monitoring procurement. Again, the DoD had reported to have created the Government Risk and Compliance Accountability committee to monitor procurement. Was this the same committee? What were the desired outcomes of the committee? What timeframe did the committee have to achieve these outcomes? Who did the committee report to, and what was the reporting timeframe?

Mr Marais said there had been an improvement in terms of the DoD’s qualifications. Was it possible for the Committee to interact with the internal audit committee in respect of the duties that it performed? That committee had a significant role in ensuring all noted challenges were addressed. The Committee was not privy to information relating to defence intelligence and the Special Defence Account, which was part of the DoD budget.  Was the Secretary of Defence prepared to give written confirmation that information to do with defence intelligence and the SDA was of a sensitive nature, and could not be shared with the Committee? The Committee was aware of reports that there had been an irregular and wasteful expenditure of R4 billion by defence intelligence. Since the defence intelligence reported to the Joint Standing Committee on Intelligence, and the Joint Committee was not greatly informed on issues of defence, the Committee could not rely on it to make a decision on whether the expenditure of the R4 billion was justified or not.

On asset management, the Commanding Officer at Komatipoort had expressed frustration with the procurement process. The Commanding Officer had said the station had requested the procurement of BF Goodrich tyres, and the procurement office in Pretoria had queried the request. They had no knowledge of what “BF Goodrich tyres” were. This showed there were problems with the procurement system.

Mr T Mmutle (ANC) said the training of the procurement division within the DoD was supposed to be a continuous process. This had to do with the fact that the procurement regulations changed from time to time. The DoD had mentioned something to do with training in its action plan. Was this related to the fact that training was a continuous process, or was this in response to the AG’s findings to do with training?

Every year the DoD submitted action plans entailing investigative processes. At the end, the DoD did not report on the outcomes of the investigations including the consequence management taken. This was unacceptable. 

The action plan presented to the Committee pointed out anomalies instead of indicating the actions that needed to be taken to address them. This was concerning.

The DoD had not presented a detailed action plan regarding the CoE. For example, the DoD had simply presented its projected financial standings without indicating its action plans regarding its number of employees

The Chairperson said the DoD did not have a detailed action plan. For example, the action plan lacked timeframes. As a result, its implementation was going to be difficult to monitor.

Mr M Shelembe (DA) questioned the consequence management imposed on serial offenders in respect of procurement processes. The DoD had indicated that the offenders been moved to different posts. How was this a form of punishment?

Department’s response

On the observation that the action plan did not provide timeframes for the implementation of certain aspects, Ms Kudjoe said the DoD would go back to the drawing board and include the timeframes. However, it had already started the implementation of certain aspects of the timeframe.  

Most of the issues flagged by the AG in the 2019 and 2020 audit reports were around procurement. For that reason, the DoD had developed a procurement training programme. The training was going to be provided on an ongoing basis. The training had already started showing positive results.

On the asset register, she replied that this had been updated. 

On asset management, the DoD had resolved to build its own capacity, rather than procuring management contracts.

She said the DoD had conducted three internal investigations into irregular expenditure. It was going to provide detailed information on the outcomes of the investigation in its next meeting with the Committee. Consequence management had been applied. The DoD had also interacted with the Special Investigating Unit (SIU) on the investigation into irregular expenditure. The Hawks had also become involved in the process, because there were cases that required the involvement of law enforcement agents. In terms of recovery, the DoD had managed to recover R41 million of the amount lost. There was promising evidence that a further amount of R71 million would be recovered.

On access to information to do with the defence intelligence and Special Defence Account, Ms Kudjoe said she was not in a position to give written confirmation that the information was of a sensitive nature and not accessible to the Committee. However, the projects that were being run by the defence intelligence were SANDF related. These projects required money, and the SANDF had an obligation to account for the expenditure of the money.

Regarding the division responsible for the preparation of the action plan, the CFO responded that each division within the DoD prepared the action plan and forwarded it to his offices for consolidation. The consolidated document was then presented to the ANC for discussion. All the Chiefs of Services were present at the discussion. 

The Chairperson reiterated on the idea of inviting the internal audit committee for interaction with the Committee.

AGSA on DoD management of Covid-19 funds

Mr Lourens van Vuuren, Business Executive, Auditor-General of South Africa (AGSA), made some opening remarks and invited Ms Mbali Tsotetsi, Deputy Business Executive, AGSA, to brief the Committee on the findings reported in the special report on the financial management of Covid-19 funds by the Department of Defence.

The report focused on COVID-19 related medicine; the deployment of soldiers to various provinces to assist with enforcing law and order; the implementation of additional health measures, including establishing quarantine sites, laboratories and field hospitals with necessary equipment; procurement of personal protective equipment (PPE); and the repatriation of South African citizens from Wuhan.

On COVID-19 related medicine, AGSA had made the following findings:

• There had been inadequate planning for the procurement of Heberon ® Alfa R (Heberon), which contained the active ingredient interferon alpha 2b, procured for approximately R260.59 million. It was not clear how the Department had determined the required quantities. 

• There was no evidence of South African Health Products Regulatory Authority (SAHPRA) approval prior to the importation of Heberon. 

• The open-ended contract used during procurement was signed only after the first delivery had taken place. 

• Subsequent SAHPRA approval was for 10 vials, as opposed to the 970 895 vials imported.

• There had been no post-importation testing. In addition, a breach of cold-chain requirements had resulted in approximately 40% of vials’ integrity being possibly compromised. 

• None of the 970 895 vials of Heberon were accounted for on the department’s inventory system, and the payment of R34.86 million was not accounted for in the financial records

AGSA had advised the DoD to institute a formal process to monitor compliance with legislation before and during medicine procurement, and to put measures in place to ensure that inventories and payments were properly recorded.

On the procurement of PPE, the findings made by AGSA included the following:

• Control weaknesses had contributed to losses and possible theft.

• PPE was not always procured at market related prices. 

• Local content and production threshold requirements were not applied when procuring three-ply surgical masks. 

• PPE contracts had been awarded to suppliers whose tax matters were not in order, and 

• There were inadequate controls in manual stock control processes at main and regional depots

The AGSA had advised the DoD to:

• Put measures in place to ensure that PPE items were procured only from suppliers or manufacturers that met the stipulated minimum threshold percentage for local production and content;

• Ensure that awards were made to bidders whose tax matters were in order at the time of the award; and 

• Monitor payments for the related awards to ensure that the irregular expenditure register was updated and that the relevant amounts were disclosed appropriately in the financial statements.

(See presentation for more details).

Discussion

Ms Modise said the AG’s report was concerning. The Committee had to zoom into the procurement of Heberon ® Alfa R (Heberon). There was no report justifying the urgent procurement of the medicine. Had the medicine served the purpose it was procured for? It appeared necessary to invite the Chief of the South African Military Health Service, Surgeon-General Lt-Gen Zola Dabula, the Chief Financial Officer, Mr Siphiwe Sokhela, the Chief of Logistics, Lt-Gen Jabulani Mbuli, and SAHPRA to further understand the reasons behind the procurement of Heberon.

Mr Marais seconded the idea to invite the Chief of the South African Military Health Service, the Chief of Logistics and SAHPRA to furnish reasons behind the procurement of Heberon. The report by the AG indicated that some import procedures and regulations had been bypassed, which showed some laws had been broken. What was more, the South African Military Out-Services had not supported the import of the medication. In addition, there had been a standoff between SAHPRA and the military police regarding the medicine. Given these events there were a lot of questions to be answered. SAHPRA had to explain its jurisdiction on the matter, and the extent to which the South Africa Military Out-Services was supposed to comply with its requirements. Was it possible for the AG to submit a detailed report to the Committee for the purposes of the meeting? What was the purpose of the report? Was this for information purposes? Was the AG going to hand this over to the Minister and Secretary of Defence? Was it going to hand it over to the National Prosecuting Authority (NPA)? 

Mr Shelembe said there was need for a deep discussion regarding the procurement of Heberon in order to ensure that consequence management was implemented. The Minister had to inform the Committee whether she had been made aware of the procurement process. Had any sort of information been made available to her?

Mr Mmutle said the report by the AG was enlightening. The Committee had received a previous report promising the lawful procurement of COVID-19 related equipment and medicine, but the AG’s report painted a different picture. The Military Command Council had to account to the Committee. The AG had indicated that the Heberon had been procured without planning and approval by SAHPRA. Did this mean SAHPRA had later condoned the purchase? In addition, had the AG checked whether the R48.6 million already paid to the supplier had been budgeted for? Where had this money come from? Did it come from the R4.2 billion allocated to Defence?  The AG had also made findings that a tender relating to the construction of field hospitals had been cancelled without clear, justifiable reasons. The tender was valued at R700 million. It was possible that some corrupt officials had pulled back the tender after having realised they were minimal, or provided no personal benefits. 

Why had the DoD procured PPE from suppliers that were not tax compliant? There was a system designed to flag service providers that were not tax compliant. Had the DoD used the system?

The Chairperson asked whether the storage of Heberon had complied with the required standards. The AG had to explain why the DoD had not listed Heberon as part of its COVID-19 expenditure on the list it submitted to the Inter-Ministerial Committee in August 2020.

Mr Marais requested the invitation of the South African Revenue Service (SARS) to its meeting with the other agencies implicated in the import of Heberon.

AGSA’s Responses

Mr Van Vuuren said the DoD or Minister could answer this question about the DoD’s failure to list Heberon as part of its COVID-19 expenditure on the list it submitted to the Inter-Ministerial Committee in August 2020, 

The AG had a detailed report on the work it had conducted on COVID-19. This was going to be made available to the Committee.

On the purpose of the report, the AG had audited the DoD at the request of the President. The audit had been conducted in terms of the AG’s normal audit mandate. The report had to be tabled in Parliament and then subsequently submitted to the Committee. It was the task of the Committee to map a way forward.

The AG had not obtained all the information it had requested from the DoD, and this had a limitation on the scope of the report.

The AG confirmed that the R48.6 million already paid to the supplier of Hebron was part of the R4.2 billion allocated to the DoD.

On the tender relating to the construction of field hospitals, the DoD had reversed this due to the fact that it had not been awarded in accordance to the prescribed procurement procedures. The Department had interacted with the supplier prior to inviting the other suppliers. The company with which the DoD had interacted had been in existence for only two months, and this had raised red flags. In addition, the DoD had given other potential suppliers 48 hours to submit their quotations.

On whether the DoD had used the central database to flag service providers that were not tax compliant, the AG explained that the DoD did not have to depend solely on the central data base. It was its duty to request tax clearance certificates from the service providers. The DoD had successfully flagged some suppliers for non-compliance and had given them seven days to do present valid tax clearance certificates. However, the DoD had given some suppliers 14 days, which was illegal.

On the lack of proper planning regarding the procurement of Heberon, the AG explained that the SANDF had submitted a guideline on the clinical management of the COVID-19 disease which they used to inform their planned procurement of any drugs or medicine they required for COVID. The guideline listed only the medicine required, without listing the specific amounts. It was for this reason the AG had reported that there was a lack of proper planning by the SANDF.

On whether SAHPRA had approved the medicine, the AG explained that there were three types of applications. The first was a clinical trial application, and the second was a section 21 approval.  The section 21 approval fell into two categories -- the box stock application and the patient specific application. During its audit, the AG had found a reauthorisation from SAHPRA issued on 5f October, despite some the medicine having arrived on 27 April 2020. It was clear that if the original authorisation was not attached to it, then the re-authorisation was not valid. The DoD had failed to submit the re-authorisation. In addition, the AG found that the Section 21 approval issued by SAHPRA on 5 October was for one patient only. The DoD had applied for the box stock application, but on 21 October this had been denied by SAHPRA.

The Secretary of Defence said there were lot of inaccuracies in AG’s report, and thanked the Committee for inviting it to a meeting to clear the air.

Mr Mmutle said the SG must raise all the issues pertaining to inaccuracies in the report with the AG.

The Chairperson said the AG had indicated that the report was limited in scope due to a lack of submission of information by the DoD. Before the next meeting with the Committee, the SANDF and the DoD had to furnish all the relevant information to the AG. In addition, the SG had to submit the inaccuracies to the Committee through the Secretary of Defence. The SG had two weeks to do this.

The Chairperson thanked the delegates, and invited Members to deliberate on the adoption of minutes.

The meeting was adjourned.