Report of the Portfolio Committee on Defence, having conducted departmental hearings on the medium term expenditure framework (MTEF), medium term budget policy statement (MTBPS) and the quarterly financial report on Friday, 05 November 2004, reports as follows:


1. INTRODUCTION

The Committee, as part of its oversight of the Department of Defence, conducted a public hearing on 5 November 2004 concerning the Medium Term Expenditure Framework (MTEF) and the Department’s quarterly financial statement in the context of the Medium Term Budget Policy Statement (MTBPS), which was tabled on 26 October 2004 in the National Assembly.


2. MEDIUM TERM BUDGET POLICY STATEMENT

The MTBPS provides a concise three-year overview of the government’s economic, social and development policy priorities. It also outlines a coherent policy framework for fiscal policy and the national budget. The Department must execute its imperatives within this framework. These imperatives are the defence and protection of South Africa, its territorial integrity and its people in accordance with the Constitution. The Department must also implement government’s decisions on peacekeeping. In order to carry out these responsibilities, the Department participates in three Cabinet clusters: the International Relations, Peace and Security cluster; the Justice, Crime Prevention and Security cluster; and the Governance and Administration cluster.

Even as the Department’s commitments have increased, particularly with regard to continental peacekeeping operations, its allocation from the national budget has been declining as a result of government policy and its indicated priorities in education, health and social development.


3. QUARTERLY FINANCIAL POSITION

The Public Finance Management Act (PFMA) requires departments to submit monthly financial reports to the Treasury. This acts as an early warning system and serves as a strategic control mechanism for Ministers and accounting officers. In mid-financial year, assessments by the Department’s Budget Evaluation Committee are used to compile the adjustments budget, which is tabled with Treasury.

The following items were included in the adjustments budget:
Unforeseeable and unavoidable items, such as Scarce Skills and Rural Areas Allowances;
Self-financing allocations: income from sales;
Rollover claims;
Humanitarian assistance to Madagascar;
Incomplete capital works;
Virements, such as the reallocation of R11 million to Defence Foreign Relations sub-programme from the Defence Intelligence programme; and
Surplus on the Special Defence Account due to the favourable exchange rate.

The adjusted appropriation required virements and additional funding from the Treasury. Virements are permitted in terms of the PFMA, which allows accounting officers to utilise unspent monies in one programme to defray costs in another. Treasury approval is required if more than 8% of the budget is moved within a main programme. The signatures of the Defence Secretary and Chief Financial Officer were put to all supporting documentation. Virements are, however, more than a mere bookkeeping exercise. Such transfers have a great impact on individual budget holders at unit or military base level.


4. MEDIUM TERM EXPENDITURE FRAMEWORK

The MTBPS acknowledges that peacekeeping deployment will remain at high levels. However, funding pressures for peace support operations will continue over the medium term.

The Department’s main priorities over the medium term are:
To review the White Paper on Defence and the Defence Review, which will ensure that the defence budget is aligned with government policy;
To prepare combat and support functions for cost-effective peace support operations;
To align resources with government initiatives;
To implement its Human Resource Strategy 2010; and
To build capacity in the Defence Secretariat.

The Department points out that unlike in the past, when funding followed function, the Department can retain the funding when it withdraws from crime prevention operations conducted jointly with the South African Police Services. This will bring about savings over the MTEF, but this could be eroded by the volatility of the exchange rates attached to the strategic defence packages.

The Department believes that two activities may shift its strategic plan over the medium term expenditure period, with consequent funding implications: (1) levels of personnel deployed to African Union and United Nations Peace Support Operations and (2) the update of the White Paper on Defence and Defence Review, which may change force design and structure.

The funding of new priorities within the existing baseline means that activities have to be terminated or scaled down, which places pressure on the services and divisions to adapt their medium term expenditure allocations. These new priorities are (1) the military skills development system and (2) integration of the newly acquired systems in the SA Air Force (fighter aircraft and helicopters) and SA Navy (corvettes and submarines).

Personnel expenditure has grown even as personnel numbers have decreased, partly as a result of annual salary increases and scarce skills allowances.

Provisions of the PFMA state that all proceeds from sales must be paid into the National Revenue Fund. The Treasury, however, has agreed that the Department can retain these funds through the adjustment budget, and the baseline of the Department will be corrected in the following year. The Committee has stressed that the South African National Defence Force is a unified entity and that income from sales should not necessarily go back to the unit that makes a sale, but to SANDF headquarters, which will decide how to apply the funds to benefit the defence force. The Department points out, however, that income from sales may span several years, and that sales of major equipment and currency fluctuations can make reporting more difficult.

The Auditor-General’s qualified opinion on the Department’s financial statements results from five factors: (1) entry of leave into the database on a manual basis, which meant that there was information outstanding at the end of the financial year; (2) movement of assets was also captured manually, with the same negative consequences; (3) information on monies that the Department collected on behalf of the state was not readily available; (4) there was a time lag between items purchased and paid for, with a spillover effect into the new financial year because information was not captured automatically; and (5) losses were not registered at unit level, which could be corrected by the introduction of registers by the Officers Commanding.

The Department emphasises that an IT upgrade can address many of these issues. The Department’s satisfactory record of unqualified opinions during the last two years has been tarnished due to the new reporting system.


5. CONCLUSION

The Committee notes the Department’s opinion that it has executed its mandate in the face of budgetary constraints and a changing global strategic environment. It also acknowledges that the Department’s capacity has been stretched, and that additional funding is needed to prevent erosion of capability.

The Committee notes a disjuncture between the strategic aims of the Cabinet clusters and activities of the departments, because the PFMA does not allow for "cluster budgeting". The Department contends that the PFMA should be amended to enable it to exercise greater control over the budgeting and expenditure process in line with the strategic aims of the Cabinet.

The Department can be more creative when tabling funding proposals to the Ministerial Committee on the Budget. The SANDF’s new role in African peacekeeping, and support to the civil authorities, means more commitments that should be adequately funded.

The Committee will continue to assist the Department to adjust the White Paper and Defence Review so that the Department’s budget will be in line with government policy.