Armscor, Military Veterans, Castle Control Board 2019/20 Annual Reports

Meeting report

Armscor 2019/20 Annual Report
Acting CEO of Armscor, Adv Solomzi Mbada, said that Armscor is largely financed through income given by Parliament and received through the Defence budget. The funding is not enough to sustain it and is supplemented by revenue from commercial services rendered, investment income and other income. To improve the efficiency of operations, Armscor introduced the strategy “On Time, In Time - Towards a Sustainable Future”. The sentiment behind these words is also to encourage the Defence Force and Armscor to become a greater and visible asset to the economy.

Armscor had several aims that it achieved and even surpassed. Included in these was the goal to measure effectiveness of the acquisition function - in contracts placed and cash flow. The goal was to get 95% of DOD system support and procurement requirements converted into orders placed. Armscor achieved 92.45%. Armscor’s achieved its first strategic objective, to generate revenue – using innovative business initiatives. Several targets were exceeded. For example, on the set goal to achieve R1 338.5 million for Group Revenue, the company managed to achieve R1370.5m including revenue from the existing facilities of Armscor Research and Development. Armscor applied cost management tools and as a result achieved its breakeven point. On stakeholder management, the company successfully increased black representation, provided provision of bursaries and succession planning development. The target for 40% female representation was not met as 38.4% was achieved.

The core function of Armscor is to acquire defence materiel and related services, mostly for the South African Defence Force (SANDF) but also for other government departments and services. During 2019/20, Armscor managed and executed contracts to a total value of R12 billion for the Department of Defence (DOD). Over 65% of this was for technology and capital acquisition projects, while the rest was for procurement and maintenance support contracts.The Hoefyster programme is intended to provide a New Generation Infantry Combat Vehicle Products System to replace the Ratel Infantry Combat Vehicle that has been used since 1976.The programme however has not progressed over the last year despite the fact that the development, initially contracted for completion in 2012, has not been completed. Delays are because of technical and financial challenges within Denel. In December 2018, Denel notified Armscor and DOD that it cannot deliver against the existing contract baseline in terms of technical specifications, delivery schedule and contracted price. Armscor reported it had developed a renewal strategy to alleviate the financial deficit and transform the Armscor dockyard.

Discussion
Mr S Marais (DA) criticised the presentation for beginning with great detail on targets but the real performance of Projects & Acquisitions – core to Armscor – was down. Projects were down from 39 to 15. He was concerned for Armscor’s sustainability and the SANDF. He asked why consultants like FeverTree were used with a spending of R70 million to secure sustainability for Armscor. In June, Armscor promised the Committee no salary increases or bonuses. However, bonuses have been paid to staff and he asked where this has been accounted for in the annual financial statements. He also asked how giving bonuses is justified given the reduced projects.

On the A-Data projects which are important for the South African Air Force, the presentation disclosed that Armscor was close to the first vessel being completed. However, DOD had affirmed that it does not have funding for such projects. The presentation indicated a 33% increase in investment revenue and a transfer received by Armscor. He asked if this transfer was for funding these projects, and if not, what would happen if payments for these vessels cannot be continued. He asked if there were any public-private partnerships. The presentation suggested a positive future for the Armscor dockyard. The removal of debris is being done only now so when will the dockyard be available for actual work. Moreover, how does Armscor foresee the dockyard operating at most effective levels given fewer funds are available? Lastly, the presentation indicated the Denel threat. He asked to what extent intellectual property (IP) is protected and used to source new suppliers of Armscor products.

Adv Mbada asked the CFO to explain what provision and considerations led to bonuses being approved. On the future funding of vessels, as the contracting party, Armscor would be liable if there was a default. There are currently no existing public-private partnerships. There are partnerships with other state entities like the State Information Technology Agency (SITA) and Police. There are commercial opportunities for the dockyard. It is difficult to let go of unserved clients which happens when there is no access to dry docking. There is little work that can be done if there is no access to dry docking. Once the disposable material is removed, new opportunities will be created for the dockyard.

Armscor CFO, Mr Gerhard Grobler, replied that when the presentation of budget reductions was done, it was made visible that there will still be a bonus for the current year at the discretion of the board. The executives recommended that these be given out for the current year if the financials of this year improved significantly. Unlike other entities, bonuses for Armscor are a month’s salary. He pointed to note 16 in the financial statement which disclosed the bonus provision. FeverTree was used for the turnaround process. They identified several revenue streams and Armscor is now trying to achieve what it identified. At that stage it was just above R50 million not R70 million that was paid to FeverTree. 

Dr van Rensburg responded about the projects saying that for all three programmes Armscor has financial authority from DOD which covers the full contracts. It is true that the DOD Special Defence Account has insufficient funds for Project Biro and Project Hoefyster at the moment. The deficit on the former project is not considerably large. It is approximately R420 million. Last week there was indication from the client and DOD’s CFO that these funds would be provided. Project Hoefyster is the concern, given that it is scheduled to run for the next few years. The CEO has indicated a number of scenarios for this. There is still a surplus on the programme (approximately R2 billion) which is from previous financial years.

Mr Marais said that the DOD CFO had previously affirmed to the Committee that there is no money for these projects. He asked if they were waiting for DOD to "make money". The contradiction between what Armscor and DOD were saying was a big red flag.

Dr van Rensburg replied that the CFO was referring to the general defence account not the Special Defence Account that is made for these projects.

The Chairperson asked that Members do not confuse the statements made by the DOD CFO about available funds in the two general and special defence accounts. Armscor says in 2019/20 it managed and executed R7.7 million for capital & acquisition and R4.4 million for procurement in its DOD projects. This suggests there still is money in the kitty, minus that which was appropriated each year to the Special Defence Account. He asked how much is left in the Special Defence Account to pay for outstanding debts and to serve contracts for work-in-progress and new projects.

Mr Marais explained to the Chairperson that he had specifically asked the DOD CFO if they had funding for Project Hotel and Project Biro – to which he had responded no.

Armscor CFO, Mr Grobler, replied that there is R7.5 billion left in the Special Defence Account, which is allocated for two projects. It is expected to decrease significantly for the next financial year. The Special Defense account is run differently. Money can roll over into the next financial year; therefore, next year’s budget makes provision for previous amounts to finance the deficits in the next financial year. The only project that is at an actual deficit is Hoefyster and Project Biro. The DOD CFO has assured Armscor that Project Biro would have funding, even if it is transferred for the remainder of the financial year. It will be carried over to next year.

Prof Noel Mkaza, General Manager for Armscor Research and Development, replied about the Committee’s concerns about IP. There is a register of all IP generated in the various contracts. There has not been any requirement by Armscor to use the IP, but should the need arise from the client – it would advise the client. As custodian of the IP, Armscor keeps a general record.

The Chairperson commended Armscor for a user-friendly Annual Report, and for attaining a clean audit. He asked for clarity on the company’s legal claims. Armscor is the defendant and this is being fought in an overseas country. One claim relates to a commission for approximately R300 million. He asked why Armscor was fighting claims abroad.

The Chairperson referred to the Armscor board choosing to sell property assets so that salaries are paid and likened it selling the household silver so that one can buy groceries.

Adv Mbada agreed with the Chairperson that it does not seem reputable to sell assets for salaries. For sustainability, Armscor’s decision-makers have concluded that they cannot rely solely on clients for revenue. Currently, there are certain divisions that have no contracts or little work coming from clients. As executives, they have a duty according to the Company Act – not to act recklessly. By coming up with initiatives and plans to manage employee costs – Armscor’s revenue will be more sustainable. When projects slow down, resources are relocated to supply chain management or operations for example. Armscor has availed its services, however if this does not improve – they will address the issue more forcefully.

Adv Boitshoko Senne, Group Executive: Business Assurance, replied that there were two pieces of litigation. The first is Beverly Securities, which is a claim that goes back to the 1980s.  The claim, being addressed in Lisbon courts, is that Armscor owes approximately R8 million for a commission that made helicopter kits to assist the then South African government. There is no proof or evidence of this, even with the preserved evidence. Last year the plaintiff attempted to persuade the Auditor General South Africa to reveal any documentation that would assist in the goodness of its claim. The matter should be concluded early next year. The second claim is a bill against an arms deal, in which Armscor appears to have the upper hand.

Department of Military Veterans (DMV) 2019/20 Annual Report
DMV Acting Director-General, Lt Gen Mbuyiselo Mgwebi (Ret.), said nine out of the 20 performance targets (45%) were achieved. DMV received an appropriation of R652 553 million and spent R477 266 million (73%). There are three programmes: Administration: 43% of performance indicators were achieved; Socio-Economic Support (SES) 38%; and Empowerment and Stakeholder Management (ESM) 60% achieved.

DMV had achieved 4 449 military veterans and their dependents being educationally supported in 2019/20 and 18 390 military veterans have approved access to healthcare services. DMV provided 643 military veterans and their dependents with counselling; 477 military veterans were provided newly built houses. DMV entered into four agreements between private sector companies and state entities. 97% of burial claims were approved and paid within 30 days of receipt in support of military veteran bereaved families. The Administration branch spent 99% of its budget; SES underspent due to non-receipt of invoices in support of basic education, private tertiary education and for the newly built military veteran houses. Despite the overall underspend in the SES Branch, Healthcare Support continue with its increased cost pressure due to increased medical bills for this veteran benefit. The ESM R63.4 million underspend was due to a lower than expected performance in the delivery of skills development along with an inability to deliver on the erection of memorial sites. The ESM branch was to provide logistical and funding support for the elective conferences of the Military Associations but the conferences were moved to 2021/22. DMV has achieved an unqualified audit opinion with findings for the past three years.

Discussion
Mr S Marais (DA) expressed concern for the health support to military veterans. It was not sustainable and sometimes compromised their safety by having to refer patients to private and military hospitals far away from their homesteads.

Gen Mgwebi replied that this was only for referrals. DMV was aware of this, and was looking for a service provider that would be able to assist. They were collaborating with the Department of Health about possibly creating minor special provision for veterans in hospitals – that would allow them to be assisted more quickly.

The Chairperson noted that there were reported claims against DMV. He asked if they were empty or substansive claims and what was their prognosis. The Committee had requested a report on cases of fraud and misconduct and their consequence management. He asked when the report was coming as it had been promised this week. This was what AGSA had pointed to as a DMV deficiency – consequence management.

Mr Marais said that there was a tug of war between DOD and National Treasury. Money is scare, and therefore all stipulated costs need to be justified and proven of value. He had seen letters from Department of Human Settlements (DHS), implying that houses will be available for military veterans. To what extent was DMV involved in talks with DHS about this. He asked how the matter will be taken up nationally to ensure that military veterans will be prioritized on the housing list.

Gen Mgwebi replied that the main challenge is at the point of the Defence Department. There seems to be a delay from the private sector in invoicing claims for medical provision of veterans. DMV had approached the Minister of Defence and requested that the accruals be written off.  They are still in court with a specific health company. Some of the court cases are from individuals who have been dismissed and are taking them to court.

Gen Mgwebi explained that DMV is getting many houses that are incomplete and they have to top-up and complete them. This has been taken to the Department of Human Settlements. Unfortunately, there has not been consequence management for several years on this. A panel was set up and was supposed to be supported by the Department of Planning, Monitoring and Evaluation (DPME) and National Treasury. It is a question of coercion and the willingness from the Department to support this. At least now, there is report that DMV can reflect on to employ its recommendations from National Treasury and DPME. He apologized for not submitting what was required and he explained the reason for the delay.

Mr M Shelembe (DA) was impressed with the Castle Control Board which had managed to save on compensation of staff. He asks for DMV’s comments on the CCB recommendation that compensation of staff should be monitored. There was a report of illegal occupation of houses meant for military veterans. He asked if these houses had been retrieved. The Department did say it had a plan to prevent illegal occupation but he asked if anything had been done yet.

Gen Mgwebi replied that R11 million had been taken away from compensation of employees. According to Treasury, this amount was the supposed increase. This means there has to be a consideration of the number of contract employees, then interns, and possibly permanent employees. The contract employees can be reduced but service delivery will be affected. On the illegal occupation of houses, meetings had been held with the Delivery Support Unit (DSU) at provincial and national level and there is an idea of where these households are located. Some occupants have been there for three years and are termed as “regulars”.

Mr Shelembe said that when houses are completed, the builders have to give the key to a responsible person. He asked if illegal occupants are given keys or if it is a break-in and should therefore be considered an invasion.

Gen Mgwebi explained that initially the contractors hand over the houses to the DSU, which is supposed to give the house keys to the military veterans. What seems to happen is the military veterans go straight to the contractors before the houses are officially given to DMV.

Mr Shelembe said this points to a lawless country where people can get keys before official authority does.

The Chairperson thanked the General and his team and they were excused.

The Chairperson asked that Castle Control Board to skip over the beginning sections as everybody was knowledgeable of that from the meeting. He asked about the R3 million that CCB had received to compensate for its losses during lockdown and also to explain why CCB did not achieve a clean audit.

Castle Control Board (CCB) Annual Report
CCB CEO Mr Calvyn Gilfellan introduced the CCB board members.

CCB Board Chairperson, Lt Gen Jabulani Mbuli, said that it has been a roller coaster for CCB this year. The number of employees had needed to be reduced in several areas.

Mr Gilfellan highlighted that CCB received an unqualified audit outcome with findings. CCB completed its long-awaited Conservation Management Plan. Despite COVID-19, CCB self-generated R5 516 780. It achieved more than 90% of its key performance indicators. CCB attracted 195 054 visitors to the Castle and managed to participate in two international and five local heritage platforms. The DOD-funded maintenance vastly improved the gardens and site aesthetics of the Castle. Lastly, media coverage reached a global audience of 1.99 billion people translating in an advertising value equivalency of R248.95 million.
 

Since the CCB is a services and hospitality organization, it relies heavily on people to fulfil its mandate (this currently means a high staff-to-operations ratio. Although the CCB only had 16 full-time posts, the interns and short-term contracts pushed this number up to 44. These figures exclude SANDF and other entities on site. The salary bill for 2019/20 was R3.978 million. CCB managed through freezing of posts; reduction in internships; and delaying of increases and incentives to reduced the salary bill by R923 000. They challenge other government entities and departments to follow its example.

Due to Covid-19, the Castle closed on 19 March 2020. It received R3 million conditional relief funding from DOD on 20 May 2020. The Castle re-opened on 1 September 2020. Activities were heavily scaled down. Relief funding was spent until the end of October 2020. CCB own revenue for this period was R206 761 which is less than what the entity would earn in a month. Visitor numbers for this period was 5 276, which is what it would normally achieve in one normal month.

Discussion
Ms A Beukes (ANC) pointed to Auditor General SA's finding on the quality of the financial statements. She asked if this was a capacity problem or a result of the short time available for preparations of the statements.

Mr Gilfellan replied that AGSA says if it has to point out errors such as spelling or minor concerns about numbers, then it will list these errors as findings. It  isa mixture of CCB not having the systems internally. There are now quarterly review meetings and the reports are sent to internal auditors to check. The errors should be reduced.

Mr Mandla Ngewu, CCB CFO, explained that the non-clean audit report is as a result of disclosure issues. Overtime payments of R300 000 were not separated from employee-related costs. For the past 20 years, this cost had not been separated. However this year – these costs were expected to be separate. AGSA has a standard template for financial statements and thus it makes sense for them to question this error.

The Chairperson agreed that it was not AGSA’s responsibility to identify concerns that CCB should have found. He thanked CCB and dismissed them.

The Committee considered the minutes of 2 September 2020. Mr Marais noted that the allocation to the Special Defence Account in these minutes has been referred to in today’s meeting with Armscor. This needs to be flagged so that clarity is provided to the Committee. These minutes and 6 October ones were adopted.

The meeting is adjourned.