DoD, DMV, CCB & Armscor 2020/21 Special Adjustments Budget

Meeting report

The Chairperson welcomed the Committee and delegation, and said it had been noted that the Minister and Deputy Minister had sent their apologies. Condolences were expressed to the Deputy Minister, whose sister was being laid to rest that day.

Mr S Marais (DA) said he was disturbed by the fact that the Minister, Deputy Minister and Secretary of Defence were not present for the meeting, as the adjustments being dealt with had a huge impact on the constitutional compliance by the National Defence Force. The apology of the Deputy Minister was understandable, as there was a bereavement in the family, but to have none of them present was really disturbing. In terms of accountability to Parliament and oversight, he emphasised that he was really concerned as to why none of them was present.

The Chairperson responded that the Minister was unwell, according to the message he had received.

Dr Thobekile Gamede, Chief Director: Policy, Planning and Strategy, Department of Defence (DoD), responded that the Secretary of Defence had planned to attend the meeting, but had been called to attend a Covid-19 engagement. He had been the one who had led the Directors General on all matters concerning Covid-19.

Impact of adjustment budget and revised annual performance plan:

Castle Control Board

Mr Calvyn Gilfellan, Chief Executive Officer (CEO): Castle Control Board (CCB), started the presentation with a recap of the meeting held on 6 May, highlights of which had been:

• The COVID-19 case at IZIKO Museums, and sending the staff home on 19 March;
• The Presidential hard lockdown on 26 March had radically changed the CCB’s operating environment, with no business, no tourists, no events – and zero income;
• A submission to the Secretary for Defence and the DoD for a R1.6m relief support package, which was subsequently increased to R3m;
• The CCB could only manage to pay full salaries for March, and 75% to non-managerial staff for April;
• It had applied to the Unemployment Insurance Fund (UIF) for relief, and had not paid management’s salaries in hope of a positive National Treasury (NT) outcome
• The Portfolio Committee had expressed empathy and concern, and would raise it at their levels, clearly distinguishing between the relief of R3 million and the CCB’s annual challenge of balancing its budget. It had also commended management for taking the severe pay-cut and looking after staff.

On 20 May, the DOD had transferred the R3 million in relief funding to the CCB. The UIF application was also successful, and R57 565 was paid over on 28 May, but after a management meeting, the UIF funds were returned on 11 June. The remaining 25% of the staff’s April salaries was paid on 21 May, and management’s outstanding April salaries were settled on 31 May. Salaries returned to normal as from 30 June.

Providing an update on the adjusted estimates of national expenditure, Mr Gilfellan said the CCB’s annual performance plan and budget had been submitted to Treasury. It made provision for an “operational subsidy,” but with the severe budget cuts and reallocations, their chances were slim. They had reprioritised the 2020/21 budget, downscaling it from the original R8.9 million to R4.6 million. Sustainability would be a challenge unless they saw a swift turnaround in the tourism and events sector. The CCB would continue its engagement with the Deputy Minister, Mr Thabang Makwetla, to address this perennial issue

He asked the Committee to note, support and/or approve the following:

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

Armscor
Mr Gerhard Grobler, Chief Financial Officer (CFO): Armscor, said it was important to look at how the group was funded. The biggest portion of their funding was done through transfer payments. They also did commercial work from the facility side, where they generated some revenue income. They were venturing into new developments to try and generate income from them.

The budget was basically a break-even budget for the current year. The impact of Covid-19 on the transfer payments had resulted in a reduction of R120 million (11%). With other income affected areas, they were facing a deficit of R242.2 million, so they needed to consider actions to counter the impact. The biggest portion was personnel-related cost. It was therefore proposed that for the current period there would be no salary increases, but that still needed to be negotiated. There would be no performance remuneration for the current and next year.

Operational costs would also be looked at; which was a very low percentage of the total cost. They had to at least generate a 5% saving on that. Voluntary severance packages would also be looked into, which would be a cost benefit in the long run. Even after the impact of the proposed actions, they were still left with a deficit of R37 billion which would have to be funded through their reserves. They did not know what the future would hold with regard to transfer payments in future years as a result of the economic outlook of the country.

Regarding service delivery, their targets were impacted by position and programme execution. Strategic objectives would be influenced by the renewal of application systems, which would be the light capital renewal programme. The financial objectives would also be negatively influenced for the current period.

Covid-19 would have an effect on service delivery targets, such as:

• The impact on service level agreement (SLA) targets relating to acquisition contracting and programme execution, with suppliers impacted by the lockdown period and import restrictions; 
• Strategic objectives, such as the renewal of applications systems critical for organisation efficiency, would be delayed;
• The capital renewal programme on the main building complex  would be delayed;
• Financial objectives would all be negatively influenced, and would impact on future financial periods as the group was supplementing the budget with interest earned.

Mr Gilfellan listed the projects which would be terminated after completion of the functional baseline:

• Mobile and static communication network;
• Deployable electronic warfare system;
• Technical field repair and maintenance capability;
• Replacement of submarine torpedo;
• Mobile air picture;
• Static electronic warfare system;
• Sea mine warfare capability;
• Field artillery gun for SA army;
• Chemical biological defence systems;
• Submarine mid-life upgrade;
• Geographic system for SA army;
• Demolition and disposal capability for SA Navy
• SA Navy frigate mid-life upgrade;
• Anti-tank weapon system;
• African soldier capability.

Referring to the general project financial risk, he said the capital budget allocation from National Treasury had been reduced to zero from the 2021/22 financial years onward. A number of capital acquisition projects had been contracted, with contracts that had contractual obligations during the period where there was no longer funding available on the Strategic Capital Acquisition Master Plan (SCAMP). Significant projects that would have a contractual obligation, but with no funding on the SCAMP during 201/22 onwards, were the Project Hoefyster, Project Hotel and Project Biro.

The industrial Implications would be:

• A general loss of capacity in the industry as a result of the reduced DOD spend;
• An increased focus on export contracts, with stringent timescales and penalties;
• A loss of capability – specifically in Denel – which would result in an inability to meet future SA National Defence Force (SANDF) requirements for critical capabilities;
• A reduction in the DOD capital budget was resulting in no new development projects, which  would result in the industry losing its competitive edge in the international marketplace; and
• The COVID-19 lockdown had further exacerbated the already precarious position of a large sector of the local defence industry.

Mr Gilfellan urged the Committee to take note of the severe impact of the reduction in defence spending on the indigenous defence industry. This was resulting in a loss of capability (skills) and capacity in the industry, a loss of jobs, and a loss of strategic capabilities to the SANDF, which were created at significant cost, and would not be resurrected without a massive investment. There would also be reduced capability of the SANDF due to obsolete and technologically aged equipment, an inability to properly maintain critical systems (aircraft, vehicles, etc), and a loss of its technological competitive edge.

Discussion

Mr Marais said the presentation painted a very bleak and concerning picture. In the circumstances, he was very pleased at the initiative of Armscor to reject any salary increases and performance bonuses for the forthcoming and current year. Along with the cuts in operational costs, the savings would go a long way in helping the company. However, the rest of the presentation was concerning, to say the least.

The delays in upgrading the submarines and frigates would impact on their constitutional compliance incredibly. He had been speaking to the DOD and National Treasury, as it impacted directly on their constitutional obligation. If they were not able to complete the projects which were already far down the line, he wanted to know whether the service providers who were building the vessels and projects had been communicated with, what the reaction had been, and whether there would be penalty payments.

He asked whether they knew what the impact on Denel would be, as it depended to a large extent on the acquisitions by Armscor on behalf of the SANDF. He suspected that whatever major impact Denel felt would affect obviously impact the ability of the SANDF to fulfil their tasks. If things were to be impacted in such a way that Armscor had to stop those projects due to a lack of capital, it would hinder their ability to respond to any outside threats. This was especially concerning after the threats received from ISIS, creating a major problem if they were vulnerable. Lastly, he wanted to know to what extent these factors impacted on the sustainability and survival of Armscor.

Mr W Mafanya (EFF) stated that almost 15 projects had been terminated. He wanted to know how much money had been already been spent on those terminated projects.

Mr J Maake (ANC) asked for clarity to be provided on the financial reserves -- specifically the amount available, and what advantage the reserves provided.

Mr T Mmutle (ANC) said that the presentation precisely reflected the impact of the budget that was being squeezed. He asked if they had made any submissions to the DOD to receive some form of relief in order to balance out some of the projects which were being severely impacted.

Armscor’s response

Adv Solomzi Mbada, Chief Executive Officer (CEO): Armscor, said that with no funding coming their way, projects were likely to be terminated, but they were not yet at the stage of declaring that projects would definitely be terminated. They had highlighted the risks that were associated if funding was not received. That made it visible to clients that they were recording potential risks which could be realised at a later stage. They were still hopeful that between the DOD and National Treasury, they would allocate the necessary resources in as far as they had contracted. The projects were crucial for the maintenance of the capability from the client environment, especially in light of the various threats. It would be irresponsible for them to not highlight and raise those issues.

As far as Denel was concerned, 44% of Armscor’s work and budget went to Denel, but the issue with Denel was one of non-performance against the necessary milestones. They had already spent R7.4 billion with Denel for phase one and part of phase two of the Star project. Four percent of the total budget was committed to Denel, but they would have to request payment as and when they performed.

Regarding sustainability, he said that as long as transfer payments continued to be reduced, and the ability to generate income decreased, Armscor would obviously be at risk. Armscor would have to reposition itself in line with the amount of money it had. Going forward, he believed there would be ongoing restructuring initiatives in order to keep it sustainable. Regarding budget cuts, they were always looking at ways of being prudent while running the business in an efficient way. They continuously tried to make sure that they contained the costs at hand. They were partly able to cushion the costs due to all the savings they had made over the years, but there would come a point where they would have to take drastic measures in order to ensure sustainability. The reserves were amounts of money that had been put aside for unforeseen eventualities including, but not limited to, retrenchments and severance packages. The reserves helped to avoid a situation where they would have to call for total liquidation.

Mr Grobler said that the reserves had helped them to retain their surplus at the end of the year, which they had not spent. The purpose was not to spend everything they received, but rather to save it for the future as well. Approximately R300 million of the reserves alone had been allocated for liquidity purposes which would become depleted, or largely depleted, by the look of it.

Follow-up questions

Mr Marais asked for his question regarding the potential penalties on contracts to be answered.

Mr Johannes Mkwanazi, Acting Group Executive: Acquisition & SCM, Armscor, said that penalties were a high risk, as significant projects were involved. Companies would tend to penalise them on the amount of work which they had done up until that point in time. 

The Chairperson asked for information regarding the advanced payment to Denel against which there had been no performance reported, such as the status and the amount of the advance payment.

Mr Mmutle asked for answers to his question regarding whether or not Armscor had applied for relief funding, as well as what impact Covid-19 had had on the company.

Mr Mbada responded that they had not applied for relief funding, as the final confirmation regarding the budget cut had come in only just over a week ago. It would be something which they would look into before making any determination.

The Chairperson said that the CEO’s response worried him even more, given the current situation of Denel.

Mr Grobler said that the advance payment was contractually in the region of R1.9 billion. The guarantee in terms of that was around R400 million. The rest had been secured through bank guarantees, as well as insurance guarantees. There was also a small amount in an escrow account which was under their control, of approximately R156 million. The R156 million was the only amount which was still available, and had not already been used for funding the business, or for project funding purposes.

Regarding the relief fund, he said that they paid for projects directly from the DOD’s account, so the shortfall for the projects would be for the DOD’s own account, and not Armscor’s. That was the reason Armscor would not be allocated funding for the shortfall of the projects.

Department of Defence 

The Department of Defence said it had submitted an estimate of R4.590 billion as a requirement for COVID 19 Operation Notlela. It had declared an amount of R1.136 billion as a reprioritisation from within the existing allocation, following the instruction from NT to all national departments.

On 24 June, the DOD had been allocated an amount of R3 billion for COVID-19 related expenses. Of this amount, R763.4 million was for the compensation of employees (CoE), increasing the ceiling to R31.9 billion. The expected expenditure on CoE for the current year was R34.9 billion, with an estimated shortfall of R3 billion.

Other reprioritisations and allocations included:

• R2.2 billion was an additional amount that must be utilized for COVID-19;
• R1.0 billion was for goods and services;
• R1.2 billion was for machinery and equipment, mainly for the SA Military Health Service (SAMHS);
• The requirement for COVID-19 goods and services was R3.6 billion. The shortfall was R1.5 billion;
• R120 million was a reduction in the transfer amount to Armscor within the DOD allocation;
• An amount of R3 million had been allocated and transferred by DOD within the allocation to the Castle Control Board (CCB) according to their request to accommodate their expenses during COVID-19.

Discussion

The Chairperson asked what the R1.6 billion allocated to “men equipment” meant. He was concerned, as he had not seen all the things the DOD spoke about when they had first done their presentation on what would be achieved. Concern was growing that one day, the DOD would wake up and realise that the money had been exhausted before they had been able to do any of the major things they promised. That had been the very reason why the DOD had been asked to produce a business plan. The Department had been informed that they needed to produce objectives and performance indicators in order to monitor their progress, to see whether or not they were actually meeting their set goals.

Mr Marais echoed the same concerns raised by the Chairperson. He sought clarification on the budget surrounding the deployment of soldiers. The increase in the CoE per soldier, from R61 000 to R75 000, was concerning to him.

He asked who was responsible for the costs of the Cuban doctors, as these had been initially carried by the Department of Health. However, they had recently been informed that the DOD was responsible for the flights and accommodation of the Cuban doctors, which amounted to R8 million and R22 million respectively. He asked if it was some sort of “double dipping,” and whether an invoice would be sent to the Department of Health for refunding the amount back to the DOD. He asked what the actual bottom line was when it came to the cost of employees -- whether the shortfall was indeed R6 billion – because if that were the case, then they would be in huge trouble towards the end of the financial year.

Mr Mmutle asked for confirmation as to whether or not they were implementing the Covid-19 R4.5 billion, in line with a Cabinet position.

Ms Naso Tyibilika, responded that the repatriation flight from China costs had been claimed from the Department of Health.

The R4.5 billion had been an estimate, because at that time some of the items that were included in the falling off had been added as well, but that presentation was still in the process of being approved.

Maj Gen Michael Ramantswana, Chief: Military Policy, Strategy and Planning, SANDF, said that provision would be made for 1 361 isolation beds, 312 bases and 173 intensive care unit (ICU) beds. They intended to procure this out of the R44.5 million that had originally been allocated. The most procurement was for critical disinfectant that could be centralised in the different units.

The Chairperson said the presentation was not satisfying. The DOD was spending money when they had no plan in place. They were shifting targets because they knew the Committee Members were all fighting that moving target.

Maj Gen Ramantswana responded that while he heard the Chairperson’s concerns loud and clear; he wanted to stress that they had a plan in place. In response to Mr Marais’ question, he said that the Department’s bottom line was something which they were dealing with, and why they were trying to appraise Members of the Committee.

Mr Marais said that the first slide had given the cost of employment, which was already a major problem due to there being a shortfall of R3 billion. That shortfall was over and above the other costs. What they required was the original R4.5 billion. He asked how much of that amount was available. He wanted to know whether the money that had been spent on the Cuban doctors would be refunded by the Department of Health. With regard to the joint operations, he asked where the money would come from, if R132 million had been spent.

The Chairperson said that the R1.5 billion was not part of the budget that they were talking about currently. It had come at a much later stage, after the Minister of Finance had already tabled the budget.

Mr Mafanya asked why the DOD had been purchasing ventilators, PPE and even sanitisers from China, especially when they ought to be supporting the local industry and building capacity. Those acts also defied the transformation and empowerment policies that the country sought to implement.

Ms Tyibilika responded that the DOD had requested an estimated budget of R4.5 billion. National Treasury had gone through their submissions which tried to justify their need for an allocation of R4.5 billion, and instead had given them R3 billion. The R1.5 billion allocation had not been part of the presentation, as it had been announced only the previous week.

Department of Military Veterans

Mr Sibongiseni Ndlovu, Chief Financial Officer, Department of Military Veterans (DMV), said that theoriginal 2020/21FY budget allocation was split between CoE (20%), goods and services (40%), transfers and subsidies (37%) and payment for capital assets (3%). R379 million (57%) of the total allocated budget had been earmarked for military veterans’ benefits. Based on the present reduction, the allocation for benefits had been reduced to R280 million, which was 52% of the revised allocation.

These benefits included healthcare and burial support, skills development, education and housing support, and compensation and social relief of distress.

The DMV had an unsteady historical spend pattern, mainly in goods and services, while variances in transfers and subsidies were linked to less  than expected service delivery on key military veterans benefits. The sudden increase in transfers and subsidies in 2016/17 had been mainly due to an increased demand for education and burial support.

Improved spending during 2014/15 had been mainly related to R175.5 million transferred to the National Student Financial Aid Scheme (NSFAS) for the funding of public tertiary students, although this had led to an audit finding that it had been an irregular expenditure/transaction. The subsequent under-spending during 2015/16 was related to delayed invoices for education support, as well as a notable under-spend on skills development and housing support. Despite the shifting of the budget from housing to education support due to cost pressure, the DMV continued to experience delayed invoice submissions by provinces, mainly by Gauteng, where there had been an improved delivery on housing support.

Regarding the 2020 special adjustment budget, on 1 June the Justice, Crime Prevention and Security (JCPS) cluster’s CFO meeting was hosted by Treasury to discuss the Covid 19 budget implications. It was during this meeting that budget cuts ranging between 17% and 25% were indicated. On 12 June, Treasury had issued an email communication, indicating a R137 million budget, together with the 2020 SAB workbook for immediate adjustment. This had been confirmed through a revised allocation letter dated 22 June.

Mr Ndlovu said social cluster departments had been used for comparative purposes due to their similar mandates, but it appeared that historical spend was used to derive the size of the budget adjustment, so the DMV had suffered the most. The sizeable increase of 12.9% and 5.2% for social development and health was mainly due to these being regarded as frontline departments. It had therefore not been easy for the DMV to withstand the reduction based on the historical spending performance.

The Department of Planning, Monitoring and Evaluation (DPME) had issued planning guidelines for departments to immediately review their strategic and annual performance plans to ensure realignment with the budget reduction.

Parliament was hereby requested to note the 2020 Special Adjustment Budget for further direction and guidance. It was also requested to also note the risk associated with the potential reduction in the baseline, considering that the DMV had assumed the status of an independent vote only as from the 1 April 2020.

Discussion

Mr M Shelembe (DA) asked for clarity regarding the pruning of the budget. With regard to the DMV’s support for education, he sought more information as to the involvement and arrangements with the Department of Education, and whether NSFAS was involved in making funds available. He understood that the DMV was struggling to build houses for military veterans, but asked if they could address the issue of the illegal occupation of houses for military veterans, and advise whether or not that issue had been sorted out.

Mr Mmutle asked what the impact of the budget cuts would have on the DMVs footprint with regard to their new provincial offices, which were a positive indicator in terms of them reaching out to military veterans and ensuring effective service delivery to them.  He asked the Department to touch on the issue of accessibility to health care and how it would be provided. With the budget cut constraints, how did they plan to manoeuvre themselves going forward?

DMV’s response

Mr Ndlovu responded that the DMV was in touch with the Department of Higher Education and Training, including NSFAS. They had a service level agreement with NSFAS, where NSFAS had given them information on what basis they were able to support students. The challenge, however, involved the age at which they fell out, and the question of income. Those were the two most significant contributing factors for students falling out. Currently, they had approximately 200 students who were being supported by NSFAS. He added that the DMV had a very good working relationship with the institution, and they met on a monthly basis.

Regarding the issue of illegal occupation of houses, he said that the DMV and the Department of Human Settlements, at both the National and Provincial level, had taken a position where they were now beginning to allocate sites to military veterans before they started building in order to allow the veterans to associate themselves with the structures which would be going up, so as to prevent an illegal occupation by any other person. Their goal was to bring the military veterans on board as early as possible and where those areas had been illegally occupied, they were looking to regularise the situation by allocating houses to the illegal occupiers if they were military veterans, as some may not have been at the top of the list but had been occupying the places for more than a year. Going forward, however, they would try their best to prevent any illegal occupation by awarding sites to individuals before they were built.

Presently, there were six provincial offices, but they were using only three, and issues such as connectivity and supplies such as computer desktops and budget cuts only helped to further hinder their work. They were working with the South African Military Health Service with regard to availing their sick bays right throughout the country, where military veterans could at least be assisted, and depending on the seriousness of the situation in terms of whatever challenge presented itself, they could be helped further.

From a budget perspective, they had already identified risks as a Department regarding funding to their three statutory bodies, as their current allocation did not indicate as to how much it needed to allocate to them. They would be making a determination based on their previous spending patterns Currently, National Treasury would allocate R683 million to their allocation internally to ensure that there was funding for those three bodies, but would leave the allocation per body up to the DMV.

The meeting was adjourned.