Budget Vote Process & Sectoral Analysis of Defence and Military Veterans: briefing by Committee Staff; Castle Control Board & Armscor on their 2014 Strategic Plans

Meeting report

The Chairperson opened the meeting by welcoming the Deputy Minister of Defence and Military Veterans, Mr Kebby Maphatsoe, and hoped that he would continue to participate in the Committee meeting to provide insight from the executive.

Presentation on the Budget Process
Mr Peter Daniels, Content Advisor to the Committee, presented a document detailing the nature of the national budget process. He outlined the legislation which empowered the Committee to function as an oversight body, consisting of sections 92(2-3), 55(2) and 215 of the Constitution; and s27 of the Public Finance Management Act 1 (PFMA) of 1999.  He then outlined the legislation which proscribes the budget process, which is mainly the Division of Revenue and Appropriation (DORA)
s passed by Parliament in terms of s77 (3) of the Constitution, and the possibility of amendment through the Money
s Amendment Procedure and Related Matters Act 9 of 2009. 

The budget cycle consisted of broad policy directives being given during the State of the Nation Address (SONA) which informs the estimates of national expenditure and the national budget process, which produces the Division of Revenue and Appropriation
s.  He provided a table detailing the time frames for budget planning and implementation, showing that a five-year election mandate is divided into a three-year rolling Medium Term Expenditure Framework (MTEF), as informed by the key executive priorities, the Department's five-year strategic plan and annual performance plans (APPs) and budgets.  Lastly, he said the Committee's role in the budget was to ensure the nation's needs are met by the scarce resources distributed through the Budget.  This is done by the Committee receiving the Departments' strategic plans, APPs and Quarterly Expenditure and Performance reports, and approving or amending the budget as per the Money
s Act.

Sector and Budget Analysis Relevant to Budget Vote 22
Mr Daniels emphasised that it was important to note the Defence Review as he presented the introduction to the to the sectoral analysis of the two departments -- the Department of Defence (DoD) and the Department of Military Veterans (DMV) -- and the two entities for which the Committee is responsible, Armscor and the Castle Control Board.  There was general agreement that the Department was under-funded and that this impacts on the delivery of ordered commitments by the South African National Defence Force (SANDF).   The Defence Review was an opportunity for the DoD to justify its budget requests.

Turning to the 2014/15 Defence budget, Mr Daniels said that since 1994 there was a downward trend in Defence's budget due to a its deprioritisation.  By comparison, other similarly placed countries spend 2% of their GDP on defence. Therefore, considering South Africa's regional dominance and the importance of the peace support operations it is involved in, there is an argument for an increased budget from the R42.8
ion allocated in 2014/15.  With SONA having spoken to the resourcing of the SANDF, it raised the question of whether the Department should be mandate driven, meaning an increase in the budget, or budget driven, accepting the limited resources.

Mr Daniels spoke to the arguments for increased funding included in the Defence Review, which states that the DoD is 24% under-funded and that if the present levels of funding persist then the decline will continue to compromise defence capability. However, contrary to this, South Africa faces no imminent military threat, yet is burdened with many socio-economic challenges. Furthermore, there has been under-spending by the Air Defence Programme, and the Special Defence Account in 2013/14 was R10
ion, which provides spending capability. He also noted that the Auditor-General’s report for 2012/13 was qualified because there was a non-disclosure of approximately R818 million worth of movable tangible assets and irregular expenditure of just over R1
ion.

The DoD correlates to the National Development Plan (NDP) by being a means to reduce youth unemployment, enable South Africa to contribute to peace and stability on the continent and combat piracy along the east coast through “Operation Copper.”  The Medium Term Budget Policy Statement 2013 shows that the SANDF spends more that 50% of its budget on compensation of employees and R150 million on troops in the Democratic Republic of Congo. The Budget Review showed that R5
ion was spent on peace support operations.

Mr Daniels outlined the main defence budgetary issues for 2014/15, starting by noting the priorities of the various programmes which fall under the DoD and DMV.   The DoD and DMV had 76 538 funded posts and no vacancies at the end of 2013.  The personnel numbers are expected to increase in order to rejuvenate landward forces and build capacity in the Defence Works Formation, although the current budget is sufficient for only 66 000 members and 66 combat units.

Regarding infrastructure spending, the DoD and DMV require the building of medical health facilities and security installations, and current accommodation and training infrastructure needs to be upgraded. The two Departments funded 25 capital works projects and 46 refurbishment projects, while R28 million was allocated in the medium term for the demolition of unserviceable infrastructure. Spending on capital works is said to increase from R109 million in 2013/14, to R121 million in 2016/17.

Mr Calvin Manganyi, Committee Researcher, presented a synopsis of the Defence budget considerations, starting with the Minister's strategic priorities. The Defence Review had been approved by the Cabinet in March and tabled in Parliament and had implications for the budget through issues such as the new force design and the need for more equipment, which all necessitated an increased budget. A second ministerial priority was for the SANDF to take over border control from the SAPS, and this had been budgeted for in the current financial year. Thirdly, the maritime security strategy includes anti-piracy efforts through Operation Copper, leading to patrols along the coasts of Mozambique and Tanzania through a trilateral agreement. The last priority mentioned was the Military Skills Development Plan, which speaks to the NDP because it aims to absorb unemployed youth.

He gave an overview of the budget allocations for each programme and important points to be mindful of during the Committee's oversight. The allocation for the DoD was R42.8
ion, a 5.3% nominal increase from last year, which in real terms means a decrease of 0.81%.  The Air Defence programme received the largest increase in its allocation (18.1%), due to it receiving R341.9 million in re-prioritised funds from the Special Defence Account for operational costs.  The Maritime Defence programme also received a real increase in funding of 11.4%, leaving its allocation at R3.6
ion, due to the emphasis on anti-piracy through Operation Copper and the replacement of off-shore and in-shore patrol vehicles under Project Biro.  Aside from the Administration programme, the rest of the programmes received decreased funding.

Turning to the general problems identified for the Committee, Mr Manganyi mentioned the decrease in allocation for the Force Employment programme and the Landward Defence programme, because this was inconsistent with the ministerial priorities of increasing border security and enabling South Africa to assist with peace and stability on the continent in line with the NDP. The problem with Landward Defence was exacerbated by the fact that during the Strategic Defence Procurement Projects, which provided Air Defence with Gripens and Hawks and the Navy with submarines and frigates, the Landward Defence forces had received nothing, requiring them to be prioritised in order to ensure full operational capability. Secondly, the Committee needed to require the Department to keep it informed about progress on the Defence Review. Thirdly, progress on the Defence Works Formation taking over capital works and maintenance from the Department of Public Works had to be established. Fourthly, progress with project Biro should also be identified.  The Committee should ensure that the R100 million set aside for the resolution of the problems with the South African Military Health Service, as identified by the ministerial task team, was spent properly.

He concluded by saying that the specific problems with each programme had been identified in the analysis document provided to members.

DMV’s budgetary considerations

Mr Wilhelm Janse van Rensburg, Parliamentary Researcher, dealt with the DMV's budgetary considerations. He alerted the Committee to the fact that the Director General and Deputy Director General had been placed on special leave by the Minister, so that they could check on how it had affected the management of the Department. 

Turning to the specific allocations, he highlighted that Administration had again received the largest allocation, with Empowerment and Stakeholder Relations receiving the largest increase in its allocation.  Issues identified under the Administration programme were that R62 million was allocated for consultants and R52.2 million for travel and subsistence -- for a Department which had only 87 staff members.  Also, there were conflicting reports on how many staff the Department actually had, with documents saying both 67 and 87 members of staff.  Outsourcing of services was another issue, because they had budgeted for outsourcing research and policy development, despite the Department having advertised the post last year.

The Administration programme’s allocation had nominally increased by 25%. This programme has 67 staff members, but an issue arises with the allocation for travel and subsistence being R7.16 million, and R844 000 being allocated to catering and entertainment.  The onus should be on the Department to explain these figures. The advertising allocation has decreased, and Mr Van Rensburg felt there was a contradiction, as the Department planned on expanding its programmes.  He also said that there was a variance in the targets across all programmes between the 2013 and 2014 APP, some of which were removed from the latter report, leaving the Committee with no means to check on the DMV's performance.

The next programme dealt with was Socio-economic Support, where the majority of the DMV's activities are found. This programme has 15 staff members, and here again there were high amounts for travel and subsistence, catering and entertainment, as well as R430 000 dedicated to stationery and printing.  The most pressing issue was the R5.84 million set aside for business and advisory consultants.  There was potential for the DMV to hold military veterans events leading to high catering and travel costs, but he suggested that the DMV report separately on this, detailing its expenditure for such events, differentiated from costs absorbed by staff.  There was also a decrease in the target for the number of military veterans with access to health care, which the Committee had previously asked the DMV to prioritise.

The last programme dealt with was Empowerment and Stakeholder Relations. Here the staff complement at the end of 2013 was five, yet the allocation for compensation of employees was R25 million.  The DMV should be asked to explain this. There were also high allocations for travel and subsistence (R40 million), stationery and printing (R900 000), fleet services and catering and entertainment.  The figures suggested a need for more specific reporting, differentiating moneys used by staff and monies which were used under the programmes for matters such as transporting rural-located military veterans to events.  Again he noted the differences in targets identified in the 2013 versus 2014 APPs, highlighting the target for military veterans’ burial support being omitted from the 2014 APP.

Armscor

Mr Manganyi dealt with the corporate plan and budget of Armscor.  He began by identifying the factors relevant to the environmental scan and said that the questions that needed to be asked are how the environmental scan factors have been dealt with over the past financial year and what steps Armscor will take to deal with these factors.  The SWOT analysis highlighted that the strengths were similar to the previous corporate plan, as were the weaknesses. Seeing that the focus of Armscor is SADC and Africa, he said the Committee should require a breakdown of how Armscor plans to exploit these opportunities, because this could assist with the entity’s funding troubles.

He dealt with the critical success factors and highlighted the question of the manner in which the various branches of Armscor's business will be registered as separate companies, and who will be responsible for this. The strategic priorities were aligned to the government’s medium-term strategic framework, as well as the outcomes identified by the DoD.  However, were these outcomes actually being realised -- for example, the concerns regarding the Simons Town Dockyard hampering service delivery?

Turning to risk management and cost prevention, he said there were 13 risks identified and rated according to the severity, and the Committee should be made aware of the reasons certain risks persist over years, the fluctuation of the severity ratings and what plans Armscor has for remedying risks which have now been rated high, such as risk three -- non-compliance with legislation.

He dealt with the financial statements of the various operational concerns of Armscor.  These were Corporate, Research & Development, Dockyard and AB Logistics.  In total, Armscor has made a profit of R800 000 in this financial year.  However, Armscor Corporate has made a loss of R700 000 and AB Logistics a loss of R2.3 million, while the Dockyard made no profit.  The Committee therefore needs to enquire about the reasons that Armscor was not able to make its projected profit of R48.7 million, as predicted in the 2013 Corporate Plan.

Turning to performance indicators, Mr Manganyi said that in the past, Armscor had set various targets at 90% and had easily achieved these, so in the interest of growth, why did it not set them higher?   Also, the under-performance in the targets for system support acquisition and defence industrial participation should be explained.

The budget for 2014 showed a nominal decrease of 2.9%, and a real decrease of 3.03%. The Administration program experienced the largest decrease in its allocation, receiving R361 000 rather than R376 000, a real decline of 9.7%. He recommended the Committee ask Armscor how it planned to maintain operations with a decreased budget, especially concerning the dockyard.

Castle Control Board

Mr Janse van Rensburg outlined the relevant issues concerning the Castle Control Board (CCB). A recent development relating to the Castle was the appointment of a new executive director in 2013, leading to the expansion of some programmes. The Castle's APP raised two issues: firstly, what the impact on income will be due to the planned restorations by the Department of Public Works; and secondly, for the Committee to ensure that the appointment of a Chief Financial Officer and an Internal Auditor on a permanent basis by the CCB will be financially viable.

He highlighted the potentially troubling performance targets. Firstly, the CCB wants to increase revenue through tourism, and here the Committee should be concerned about the impact this will have on ticket prices and accessibility for local people.  Secondly, the Committee should ensure that the selection of the 20 interns and ten community workers are representative of South African demographics.  Lastly, the Committee should ask to be informed about the plan to increase the reach of its positive media coverage from five, to six million people.  

He also listed the new outcomes in the CCB's APP.  The CCB plans to spend R980 000 on kick-starting the tourist potential and the CCB should provide a details of its plans to the Committee.  Despite the above, the target for tourist attraction during the MTEF period is only 10 000 new visitors.

Other financial considerations that might require clarification included the new and increased allocations reflected in the CCB's budget, such as travel and subsistence, entertainment, printing and publishing, and museum expenses.  The CCB plans to spend R8 million of the R12.9 million surplus which it has built up over the MTEF period.   Mr Van Rensberg recommended the Committee enquire about a typographical error in the APP, where it states “R270 000 will be spent on the acquisition and refurbishment of –“, leaving it unclear.  It should also ask whether the projects will be used to boost revenue, if any of these projects continue beyond the MTEF period, and what the CCB has planned for the remainder of the surplus.

Discussion
Mr R Ramakatsa (EFF) wanted to know the reason for the concerns over the financial viability of the CCB's Chief Financial Officer and Internal Auditor, but said the Committee needed to be wary of interfering with efforts to have financial control and compliance processes in place.

Mr Van Rensberg replied that perhaps the CCB would be better placed to answer and that he was just concerned that a permanent CFO could be a strain on a relatively small entity’s funds.

Mr D Gamede (ANC) felt that the presenters needed to be careful with making comparisons between countries’ budgets because of the potential that different variables informed the various budgets. He said he could not reconcile 99% spending with a 75% success rate, because with this level of spending should result in more success. Lastly, he wanted to know about the DoD's role around airport borders.

Mr Daniels replied that what he was trying to do, was to compare South Africa with other developing countries, but only in order to demonstrate the increased burden on South Africa considering its position within the Southern African Development Community and Africa.  In terms of expenditure the Department, due to under-funding, had to reprioritise funds from areas such as IT projects and equipment acquisitions, to give to other programmes for things such as more sea hours or flight hours under the Air and Maritime Defence programmes.  He said that the SANDF was responsible more for border patrols than points of entry, such as airports.

The Chairperson asked what Mr Van Rensberg suggested the Committee do concerning the Director General and Deputy Director General of the DMV being placed on special leave.  What informed his concerns with the allocations which he had highlighted under the DMV?   What had Mr Daniels meant by “does the budget serve the nation?”

Mr Van Rensberg replied that regarding the DMV leadership, he meant that the Committee must ensure that the Department continues to be fully functional and being managed efficiently. Regarding his opinion of the allocations, he said that looking at the programmes such as Administration, at face value the budget exceeded reasonable amounts for area such as travel and subsistence for a staff complement of 67. However, he conceded that there may be legitimate reasons for this, and the onus was on the DMV.  He also said that in future it could be useful for the DMV to give a more detailed report outlining the amounts spent on staff and the amounts spent carrying out the activities of the programmes .

Mr Daniels replied that the mandate of the SANDF was to protect the people and territorial integrity of the country, and recent events had shown that South Africa had a capable Defence Force. However, he also said that with the current budget there was going to be a decline in operational capability and while defence spending was limited during times of peace, the decline must not be allowed to go on too long.

Castle Control Board
Lt Gen Bongani Mbatha, Chief of Logistics, SANDF, opened by introducing Lt Gen (Ret) Justice Nkonyane, Chairman of the CCB and Support to the Chief of Logistics, SANDF, who presented the briefing on the CCB. 

He said that the presentation was structured mainly to orientate new members regarding the regulatory framework, show how the objectives of the Castle Management Act 207 of 1993 have been translated into strategic plans by the CCB, how the CCB has dealt with the recommendations given by the Auditor-General in the last audit cycle, and the CCB's progress on the issues raised in its last interaction with the Committee.

He then outlined the authority structure of the CCB under the Committee, as well as the composition of the CCB and a management organogram of the Castle management section, detailing the positions and people who fill these posts. He also indicated that the core of the CCB's mandate is found in the Castle Management Act, the PFMA which declared the Schedule 3A entity and not just an endowment property, and the National Heritage Resource Act 25 of 1999 which stipulates the manner in which this heritage site should be managed.

Lt Gen Nkonyane dealt with the strategic priorities for MTEF 2014-2017. First, the CCB wished to assert its influence in all matters affecting heritage conservation, tourism and education. Secondly, it seeks to strengthen the human resources component and corporate governance to effectively implement the CCB's new strategic direction. In this respect, the CCB has managed to appoint an executive director for compliance with the Castle Management Act, a CFO to be compliant with the PFMA, and specialists in tourism and heritage management will be appointed for compliance with the National Heritage Resource Act.  Thirdly, it aimed to protect and promote the Castle of Good Hope's historic significance. The fourth priority was the pursuit of profitable public and private sector partnerships, because the Castle is funded solely by its own revenue. Fifthly, fast-tracking the development of the Castle's tourism potential was essential.  Sixthly, the Castle's public image and brand, which is mainly conducted through social media and the Castle's website, had to be enhanced, and a marketing specialist was in the process of being recruited. Finally, a more interactive and customer driven approach to heritage tourism would be encouraged.   He also noted that the Committee had advised the CCB to interact with the Department of Basic Education in order to prioritise school visitation.

In 2014/15, the CCB intended to ensure a sound administration and good corporate governance, which had in general been achieved through the CFO putting in place internal controls, and the CCB also received an improved unqualified audit. The CCB also managed to ensure the maintenance, preservation, interpretation and showcasing of the history of the Castle by ensuring the maintenance of this national heritage site and the formation of a plan of action for it to be accredited as a world heritage site. The CCB also maximised tourist potential, as evidenced by consistently increasing visitor figures. The public image of the Castle had also been improved through increased media coverage, such as the shooting of historical films at the Castle and the hosting of community events there.

The CCB’s performance highlights for 2014/15 were firstly, the unqualified -- and potentially clean -- audit from the Auditor General. Secondly, the CCB's corporate governance capacity and legislative compliance had been improved with the appointment of a CEO and CFO, along with an internal audit committee. Thirdly, the issues with non-compliance regarding supply chain management had been dealt with by the CFO, who had instituted the necessary charters, systems and registers. Fourthly, the CCB had achieved all but two of the key performance indicators identified in its previous APP.   Finally, the CCB had accumulated a R13.9 million surplus which it planned to use, and had applied to National Treasury for approval in line with the PFMA.

He outlined the revised future expenditure for the CCB's four programmes in 2014/15. Clean Administration received the largest allocation, with R3 573 000.  Conservation and maintenance received R1 463 000, tourism and promotion received R75 000 and public action and education received R260 000. The CCB’s notable plans include castle renovations and world heritage site ambitions, the establishing of a multi-faith place of worship and the re-imagination of the Castle space and narrative to reflect more than just the colonial history of the Castle.

Finally, he dealt with the strategic risks which the CCB faces. He emphasised that the risk the CCB faces in losing scarce skills which cannot readily be found within the DoD, for example, the curator. There is also a risk of the CCB being unable to comply with its heritage maintenance and tourism mandates in the long term because of a lack of sustainable funds.  Non-compliance with local, national and international legislation, policies and procedure is also a risk. Finally, there are concerns with the DoD's refurbishment project.

He concluded by outlining what the CCB hoped for from the Committee, which in essence was for it to perform its oversight role by engaging with and lobbying for the interests of the people. It should ncourage government departments to use the Castle as a venue for events, with the same going for constituencies.  Lastly, he extended an invitation to the Committee to visit the Castle for a tour.

Discussion
Mr S Esau (DA) asked how the restoration and repairs would be done, and how it would not impact on the revenue generation of the Castle.  Were the CFO and HR positions are permanent, because these were usually expensive, and especially so for such a small entity? Further, would the surplus funds be used to cover the future expenses in the Castle, especially considering the planned expansion of the Castle's programmes? He wanted to applaud the CCB for the changes to its APP, because it was more transparent and provided the opportunity for the Committee to effectively conduct its oversight.

Mr Mandla Ngewu, Chief Financial Officer, CCB, replying on the effect of restoration efforts, said there would some impact on revenue generation, mostly corporate events, but it was planned in stages to allow for minimal disruption. The CFO position had been filled and budgeted for, not a permanent 3-year contract, and on this basis it was viable. On the increased tourism revenue, no significant increase was envisaged in ticket prices in 2014/15, as aggressive marketing would be the main means to increase ticket sales. The surplus was to be used and details were given in appendix (b) of the APP, including a variety of restoration projects, expansions of the heritage experience and continuing the commercialisation of the Castle.

The Chairperson said on behalf of the Committee that it would accept the invitation to the Castle, and asked whether it had anything planned for international Nelson Mandela Day. 

Mr Derek Williams, CCB Secretary, replied that the CCB did have something in mind but it had not been concretized.   Also, the executive director would be better placed to answer.

Mr Gamede asked if there was any time frame for the appointment of the Castle Precinct Coordinator.

Mr T Bongo (ANC) wanted to applaud the CCB for the good, stable work which it was doing.

Lt Gen Mbatha thanked Mr Bongo and replied to Mr Gamede that the proper person to answer the question was the executive director.  However, he had indicated that by the end of the financial year all vacant posts in the management section would be filled.

Mr Esau wanted to know about how the interns would be used by the CCB and whether they would receive a stipend, considering that there was an amount of money allocated. He also wanted to know about the reasons behind the increases under various headings, including travel and subsistence, catering and entertainment, museum expenses and printing and publications.

Mr Williams spoke to the internship programme, which he said was not new but had been expanded under the new executive director. The 20 interns were from tertiary institutions in various fields, with invitations being extended to all faculties, and they received a monthly stipend of R1 200. This was funded out of the CCB's administrative budget. With regard to the ten community members, the executive director had been approached by community forums and NGOs, from which candidates would be selected. The basis for this was giving the community members the opportunity to receive a learnership, enabling them to be a tour guide, for example, in return for the manpower they provided for the castle.

Mr Ngemu responded to the budgetary issues.  As the CCB now had a CEO and CFO, this led to an increased amount of travel. There had not been much of an increase in terms of entertainment (approximately R2 000), which was mostly spent on high profile guests. The increase in the printing was because of the planned advertising campaign. The increased museum expenses were due to the new exhibits.

Mr Esau asked about how the CCB intended to increase its media coverage from five million to six million under the key performance indicators, while in the APP the target stood at 15 million.

Mr Williams replied that regarding the 15 million target, it was the executive director’s document and he was not in a position to explain this.  However, regarding the one million person increase, an independent company would be engaged to monitor the coverage, while the increase itself would be achieved through the advertising campaign and media coverage of events which take place at the Castle, such as the Heritage Day event.

The Chairperson then asked Mr Esau if he would accept written responses on his question from the executive director, and then asked the Deputy Minister if he had any comments.

Deputy Minister said that he was also new to the position and having had this opportunity to listen to the position and plans of the CCB, he would like to reiterate the Chairperson and Mr Bongo's remarks, saying that the board was doing good work. He added that the Minister had said that all DoD events would be held at the Castle of Good Hope.

The Chairperson declared the meeting adjourned, to reconvene at 14:00.

Minutes

Armscor Corporate Plan 2014/15- 2016/17

Vice Adm (Ret) Refiloe Mudimu, Chairperson of the Armscor Board, said that the board had taken office from March 2014 and since then had taken steps to fortify relations with stakeholders, including the Committee,,which it looks to for guidance and inspiration. He said that the board aims to work with stakeholders for a better Armscor and defence industry in South Africa.

Mr Sipho Mkwanazi, Acting Chief Executive Officer, Armscor, introduced the presentation by stating that Armscor was created as the entity to be the main procurement arm for the DoD, with the government being represented by the Minister of Defence and Military Veterans.  Armscor is controlled by a board of directors reporting to the Defence Minister, with two major functions serving as accounting authority for Armscor and the Defence Materiel Tender Board.  Armscor's main business is handling the procurement of equipment for the DoD, and research and development of defence equipment.

Armscor consists of three core functions:

Acquisitions, which is responsible for converting the DoD's user requirements into the requisite equipment (a detailed life cycle is provided in the presentation);

Research and Development, which consists of ballistics and vehicle testing ranges, several research facilities; and

The Dockyard, which engages in maintenance of all naval systems for Maritime Defence.

Armscor also has the support function which encompasses quality assurance, marketing, compliance, human resources, finances and infrastructure and IT divisions.

Armscor’s's strategic objectives for the 2014/15 to 2015/17 are aimed at improving the following: accountability in the execution of its mandate; customer satisfaction; efficient and economic service delivery;utilisation of human resources to deliver, as defined in the Armscor Act, shareholders compact with the Minister of Defence and Military Veterans and in terms of the service level agreement (SLA) with the DoD.  The strategic objectives are based on identified challenges, such as under-funding, skills attraction and retention, as well as operational efficiencies.

The first strategic objective is funding and growth, where there are two main aspects: the capability maintenance fee transferred from the DoD, to maintain operational capability and income generation. Looking at the capability maintenance fee, one can see a shortfall in terms of operational expenses, which is made up through the exploitation of commercial opportunities such as the use of intellectual property generated through Armscor research and development, as well as the commercialisation of facilities such as the Alkantpan ballistics testing range. Next,  people and capabilities, where Armscor is involved in recruitment of skilled individuals through efforts such as bursaries given to university students, the talent pool programme which trains current employees and the succession and retainment programmes which respectively entail skills transfer from retiring employees and the creation of a positive, cooperative corporate culture. Thirdly, organisational effectiveness and efficiencies focuses on the renewal of infrastructure and equipment, mainly in terms of information and communication technology (ICT), the Dockyard and the implementation of the business and disaster management plan. Finally,stakeholder relations requires the building of working relationships with important stakeholders who have been rated according to their potential importance to Armscor, such as Denel, local defence industry suppliers and various government Departments.   Mr Mkwanazi noted that each of these objectives had targets attached and a plan of action for realising them, as contained in the presentation document.  Further, there was an initiative to improve the Armscor brand in the region and Africa.

Moving on to the critical success factors, Mr Mkwanazi mentioned implementation of strategic projects which were able to sustain the defence industry and which would yield results in terms of the government’s NDP outcomes, such as skills development and job creation through efforts such as shipbuilding.  The efficient use of organisational resources also needed to be ensured. Strong regional and international cooperation hadto be built to capitalise on the market expansion plans. Stakeholder support was critical for Armscor's success.

Turning to the service delivery indicators agreed to by Armscor in terms of the SLA with the DoD, he said that under acquisition, three indicators were agreed to: contracts to be placed and contractual payments to be made are set at 90%. For example, in terms of contractual payments, once these orders are placed, Armscor needs to ensure that at least 90% is paid in time. In terms of management of the defence industrial participation, a target had been set of R129.1 million. The target for management and execution of defence research, tests and evaluation is set at 90% compliance, with time frames for projects which the DoD contracts with Armscor for. The Dockyard also has a 90% compliance requirement as its target for project completion.

Mr Mkwanazi summarised the financial overview of ARMSCOR.  The major funding component was the transfer from the DoD under the capability maintenance fee, which covered 82% of the budget of Armscor. From the other commercial project  Armscor engages in, it receives 6.3% of its budget, investment revenue is at 2.3 %, and other income makes up 8.7%. The main expenditure is on personnel and related expenses, which comes to 79.8%.  This includes both salaries and training.

Looking at the activities required in light of Armscor’s mandate, this has led to a budget in the corporate plan which contains unfunded items.  This will lead to negative expenditure for the 2014/15 financial year, which is unsustainable.  Important projects which require funding are the infrastructure projects in the Dockyard and for ICT.  In sum, Armscor is still commercially viable, because of the non-current, equity funding and current assets being valuable, but with the present funding, a deficit can be expected over the METF.  This can be compared to non-current liabilities, with the largest being the post-retirement fund payment of R1.8 million.  He also highlighted that the commercial enterprises run by Armscor, such as Alkantpan, Gerotek and Hazmat received the bulk of their funding from their commercial enterprises, with more than 70%  self-generated on average.

Achievements for the 2012/13 financial year included a clean audit for the past 20 years.  Armscor also improved its BBBEE accreditation rating from seven to three. Having taken over the Dockyard, Armscor was able to secure ISO:9000 certification and continued to seek other international quality assurance standards.

Discussion
Mr Esau wanted to know the status of the CEO, and whether it would be settled by the board. Considering the Defence Review which has been approved by Cabinet, had Armscor reconsidered its position with respect to Denel.  In light of the decreased budget and targets being set at 90% compliance, despite the fact that in previous years Armscor could have achieved 100%, if not more looking at its budget, what specific opportunities would be used to generate funds to compensate for the decrease in funding? Turning to the environmental scan contained in the Committee Researcher's presentation document, he asked how these factors were addressed in the past five years.  Again referring to the Committee Researcher's document, he asked whether Armscor had plans to exploit the strengths as identified and to deal with the weaknesses as identified. The Armscor presentation spoke of independent companies being set up to run Armscor’s various businesses, and he wanted to know exactly what was envisaged and who would be responsible. Had the SADC strategy, which was identified as a critical success factor, been drafted?  The Dockyard had received a good SLA report and ISO accreditation, but what then was the issue -- hearing issues about staffing and capacity, how did one reconcile these two?  Also, how would the improvement and modernisation of the Dockyard be funded when the DoD had many priorities and a limited budget?  Customer satisfaction was not the case, especially in terms of frigates in the Dockyard.   The envisaged profit margin of R47.8 million was actually R800 000, so how would Armscor deal with the future losses expected to arise.  He also wanted to know how unfunded expenditure could occur where there was an SLA which stipulated requirements. Lastly, he wanted to know why there was consistent under-performance in the selected performance indicators where the target was set at only 90%, while Armscor had been capable of surpassing these targets in the past.

Mr Mkwanazi replied that relating to the Defence Review, Armscor had participated and had looked at it in terms of how it would impact Armscor's business in the future, and this would be unpacked as milestones during their strategy session. Chapters 9, 10 and 15 of the Defence Review aimed to ensure Armscor was in a position to support the new plan. The reason for the 90% targets was that Armscor deals with programs where payment is made on completion and there could be setbacks such as delays, poor industry performance and cash flow.   Also, this was a benchmarked standard for similar entities internationally.  

Mr Mkwanzi said the SWOT analysis had been done and there was a plan in place for the weaknesses and the strengths, using the commercial potential such as Alkantpan and opportunities through strategic practices, with other enterprises. The reasons for the fluctuation of risks was due to action taken by Armscor -- for example, in terms of non-compliance with  legislation, a risk was identified and therefore a compliance department headed up by an advocate who acts preemptively was established.  Regarding the registration of Armscor businesses, with the intent of potentially outsourcing, the feasibility study had been completed internally and now benchmarking with similar companies was occurring. The same applied to the Dockyard, where studies had also been completed and recommendations had been received.  These were being looked at and it was being decided whether to keep it within the organisation.  The viability of the Dockyard had been jointly studied with the Navy, trying to make a plan to deal with the shortfall in the Navy's requirements in terms of the project requirements and human resources, but servicing the needs of the DoD was always paramount. Following the work done, the Dockyard's risk rating had changed, because the Dockyard was in a worse position when the study was carried out and aspects had been dealt with through certification of certain equipment, quality standards accreditation and improvements in the human resource situation, which was funded as a critical area by the DoD.

To reconcile the customer satisfaction target with the frigate delays, it was realistic to have only a 90% compliance target, because one needs to be mindful of potential delays in even planned maintenance -- for example, lead times in acquiring parts and the SLA with the Navy reflects this projected performance in light of Armscor’s capabilities, such as the issues with the dockyard. The target is signed by the Navy and is audited by the Auditor General.

In terms of the regional strategy, what has been done thus far is a desktop analysis of the market and looking at five possible countries for cooperation.   What was critical in this analysis was that Armscor will not be able to achieve any collaboration without the DoD.  Turning to unfunded expenditure, Armscor had certain agreed requirements and there was an unagreed shortfall. Armscor therefore needed funding to reach the requirements of the projects.

Vice Adm Mudimu gave an undertaking to the Committee that in the next meeting, the appointment of the CEO would be resolved. The board had reflected on the matter and all that remained was for the Chaiperson to present the board's report to the shareholder.  In terms of the Defence Review, the Chairperson was supposed to meet on that day, but this had been postponed and Armscor’s position could be clear after this meeting had been handled.

Mr Esau said that the total number of personnel had increased from 1 567 to 1 739 because of the need to fill critical posts. However, if one looked at the number of funded and approved posts, it was at 1567.  The number posts approved on the establishment was the same, according to the document provided by the Committee researchers.  He wanted to understand what had happened to the decreases which ought to have come from retirements and resignations. Lastly, he would like to know what litigation was on the table for Armscor at the moment.

Lt Admiral Mudimu asked for the opportunity to give a written response, because they did not have the documents to which Mr Esau was referring.

The Chairperson said that if Armscor had produced strategic objectives, it meant that it would be implementing strategic plans.  He would therefore like to have details of the plans in the next quarter -- what was done and how much it cost.

The meeting was declared adjourned.