1. Analysing Budget Figures. In analysing the consolidated national expenditure by type of service it is important to note that figures presented on pages 57 and 59 do not reflect only the allocation to the Department of Defence. It also includes the allocation of the SASS account which forms an integral part of the allocation of the National Treasury. For purposes of reporting on national and provincial expenditure by type of service this is in terms of the classification of functions of government which is an international standard.
2. Historical Perspective. To understand the challenges facing Defence to support the cluster objectives and themes, a brief historical perspective is essential. Table 1 reflects Defence’s budget both in terms of GDP and Government Expenditure since 1994 taking into account the impact of the Strategic Defence Procurement Programme.

 

Table 1: Budget history: Defence budget allocation (Rm)
FY	Total	Excl SDPs	Def contr	Y-o-Y growth (T)	Y-o-Y growth (D)	CPI	% of GDP	% of GE
94/95	11,310	11,310				8.8%	2.6%	7.8%
95/96	11,961	11,961		5.8	5.8	8.7%	2.5%	7.6%
96/97	11,269	11,269		(5.8)	(5.8)	7.3%	2.1%	6.5%
97/98	10,679	10,679		(5.2)	(5.2)	8.6%	1.6%	5.6%
98/99	10,374	10,374		(2.9)	(2.9)	6.9%	1.4%	5.1%
99/00	10,679	10,679		2.9	2.9	5.2%	1.3%	4.8%
00/01	13,910	11,128	117	30.3	3.1	5.4%	1.5%	5.9%
01/02	16,053	13,154	247	15.4	16.0	5.7%	1.6%	6.1%
02/03	18,844	14,191	612	17.4	3.2	9.2%	1.6%	6.3%
03/04	19,800	13,574	767	5.1	(9.8)	8.5%	1.6%	6.0%
04/05	20,257	13,600	714	2.3	(5.1)	6.0%	1.5%	5.5%
05/06	22,124	15,967	1,089	9.2	9.4	5.5%	1.5%	5.5%
06/07	22,361	16,046	1,165	1.1	(6.8)	5.0%	1.4%	5.1%
07/08	21,327	16,848	1,126	(4.6)	(2.0)	5.0%	1.2%	4.6%
08/09	22,234	17,691	1,245	4.3	(2.4)		1.2%	4.6%
Average				5.4%	0.04%	6.8%	1.7%	5.7%

3. Declining Priority. Government spending on Defence has declined in the face of social and domestic delivery priorities. However, increasing demands on the DOD to participate in peacekeeping operations have necessitated a request for additional funding against the background of returning R1 billion to the National Revenue Fund due to favourable exchange rates impacting positively on the Strategic Defence Procurement Programme.
4. The MTBPS also comments on the increased spending in the current financial year (2004/05). This is the topic of the next part of the briefing.

1. In terms of the reporting requirements of the Public Finance Management Act the Accounting Officer must prepare and submit to the National Treasury by the 15^th of each month, an Early Warning Report indicating the expenditure to date and the anticipated expenditure for the remainder of the year.
2. This report serves as the strategic control mechanism of the Plenary Defence Staff Council, the Secretary for Defence and the Minister of Defence on the in-year execution of the plan.
3. Mid-year it is supplemented by the assessment of Defence’s budget execution by the Departmental Defence Programme Budget Evaluation Committee. The results of this evaluation are used to compile the Adjustments Budget.
4. The mid-year expenditure is tabulated below:

Current Expenditure and Projections Expenditure



5. Reallocations and Other Adjustments

1. In terms of the Public Finance Management Act the Accounting Officer may utilise a saving within a main division (programme) towards the defrayment of excess expenditure under another main division (programme).
2. The Secretary for Defence has authorised several such reallocations, most of which are the result of the movement of personnel between programmes; the funding of the Warrant Officers’ Academy; and anticipated shortfall in the Foreign Relations environment.

 

ADJUSTMENTS BUDGET

6. Origin of Requirements. Emanating from
1. the expenditure reflected above;
2. new policy developments; and
3. previous dispensations allowed by the National Treasury;

the Early Warning Report was prepared indicating Defence’s requirements to be included in the Adjustments Budget.

7. Included in the Adjustments Budget. The following items were included in the Adjustments Budget:
1. Unforeseeable and Unavoidable Items: Scarce Skills and Rural Areas Allowances.
2. Self-Financing Allocation: Income from Sales.
3. Roll Over Claims:
4. Assistance to Madagascar.
5. In-completed Capital Works.
6. Virements: Reallocation from Defence Intelligence to Administration.
7. Surplus on the Special Defence Account.
8. Unforeseeable And Unavoidable: Scarce Skills And Rural Areas Allowances

1. Background

1. The Department of Defence, as a member of the Department of Health’s National Human Resources Committee (NHRC) was involved in investigations on the retention of scarce Health Professionals in the Public Health Sector. On
   6 May 2003, the Minister of Health announced that the Health Sector had been allocated RM500,0 to recruit and retain scarce Health Professionals especially in rural areas.
2. In January 2004 the Public Health and Welfare Sector Bargaining Council (PH&WSBC) concluded an agreement on the payment of the Scarce Skills and Rural Area Allowances. The Department of Defence as well as other departments employing health professionals were unambiguously excluded from these resolutions and were advised to initiate their own actions to have similar allowances funded and instituted for their Health Professionals.
3. It was only at this stage that Defence could commence with the determination of the impact on its budget. It was clear from the initial determination that Defence was not able to include the expenditure within the current or future allocations.

2. Defence’s Position

i. The implementation of the Scarce Skills and Rural Area Allowances in the Department of Health (DOH) resulted in an untenable situation as the Military Health Professionals, who are difficult to recruit and retain perceived their exclusion as a discriminatory measure. This dissatisfaction has resulted in the Surgeon General being confronted by a large component of South African Military Health Service (SAMHS) Health Professionals indicating their intention to resign unless Defence provides similar benefits to those implemented for Health Professionals in the DOH.

ii. The Secretary for Defence subsequently approached the Department of Public Service and Administration (DPSA) for a determination to implement the allowances for Health Professionals employed in Defence. The Minister of Public Service and Administration (MPSA) advised Defence to deal with the issue in terms of the collective bargaining arrangements before she makes a determination. Agreement was reached in the Military Bargaining Council (MBC) on 16 September 2004.

iii. Defence is unable to fund the RM25,405 required for 04/05 for the implementation of the allowances with effect from 1 July 2003.

3. Self-Financing Allocation

i. The National Treasury has provided a dispensation within which the income realised from the sale of redundant and/or obsolete equipment may accrue to Defence. It has further provided a dispensation that income realised from certain services provided to external parties may be provided to Defence for utilisation.

ii. The income realised in the past financial year and being claimed is tabulated below:

Income Requested

Ser No	Item	Amount Rm
	A	b
1	Income: Special Defence Account	121,392
2	Income: General Defence Account	22,214
3	Grand Total	143,606

 

4. Roll-Over Claims. The Public Finance Management Act provides for payments not made in a particular year, for reasons beyond the control of the department, to be rolled-over to the next financial year. Defence claimed two amounts, namely

1. An amount of RM10,887 underspent in the Department of Provincial and Local Government to be rolled over and provided to Defence to cover cost resulting from the assistance provided to Madagascar for water and medical support in 2003/04; and
2. An amount of RM13,906 in respect of capital works meant to have been undertaken by the Department of Public Works which never came to fruition.

5. Virements

i. The increased demands on Defence Foreign Relations as a sub-programme of Administration has caused a projected shortfall of RM11,000. The assessment of the overall expenditure revealed that the Defence Intelligence Programme would be underspent in the current year.

ii. A reallocation of RM11,000 from Defence Intelligence Administration was included in the Adjustments Budget.

1. Surplus On Special Defence Account. The improvement of the rate exchange on the Strategic Defence Packages has resulted in a surplus of RM900 currently being carried in the Special Defence Account. The amount must be returned to the National Treasury.

1. Response by the National Treasury. The National Treasury’s response subsequent to Treasury Committee’s deliberations is quoted below:

a. "Your request for the funding of additional expenditure of RM59,279 was submitted to the Treasury Committee for consideration.

b. No additional funds were approved, as your request was not deemed to be unforeseeable and unavoidable."

c. Details of other amounts already approved by the National Treasury are presented in the table below:

 

Ser No	Item	Amount R’000
	a	b	C
1	Funds Rolled Over: Operational Cost Madagascar		10 887
2	Self- Financing Amounts Sale of old equipment Special Defence Account	22 214 121 392	143 606
3	Savings Foreign Exchange on Strategic Defence Packages		(1 000 000)
4	Total		(845 507)

CONCLUSION

2. The non-allocation of funds to supplement Defence’s budget to cover the payment of the Scarce Skills and Rural Areas Allowance places Defence in an untenable position. Should equity within the various state departments not be maintained in respect of the remuneration packages applicable to these scarce groupings, Defence will, without doubt, experience an uncontrollable and unaffordable exodus of these groupings.
3. This issue has been referred to the Minister of Defence and his directive is awaited.

Source of Funds	2003/04 R’000	2004/05 R’000	2005/06 R’000	2006/07 R’000
Armament Acquisition Master Plan	63,650
Bridging Funds	100,409
Special Defence Account		217,780	120,247	155,221
General Defence Account		5,013	4,753	4,753
Total	164,059	222,793	125,000	159,974
Cumulative Total				671,826
Minus Original Allocation				63,650
Total Additional Allocation				608,176

1. The expenditure provided for on the General Defence Account (GDA) relates to operational test & evaluation, fuel to perform trials and project office costs. This is an integral part of the project. The GDA amounts are not visible in the budget submission of the Special Defence Account (SDA), but are actually expended on the project. The allocation as reflected in the table depicts the realistic allocation of funds towards the project taking into account the reprioritising of funds in 2003/04. At present the 2004/05 allocation amounts to R217,780 million (SDA) and R5,013 million (GDA) totalling R222,793 million. A major portion of the allocation for the Rooivalk Combat Support Helicopter Capability will be for the production and development thereof. The remainder will be utilized to fund the critical maintenance cost of the Rooivalk Combat Support Helicopter Capability.

1. Programme Command and Control. In considering possible structural adjustments to Defence’s 2005 baseline allocation the National Treasury was requested to consider a baseline adjustment of the Command and Control Programme and specifically for Peace Support. For the latter part of the medium term the National Treasury allocated only an additional R500 million per annum for this purpose. If the current levels of deployment need to be maintained this is clearly insufficient. The full requirement remains at R700 million. If only R500 million is affordable, R352,490 million will be allocated to maintain current force levels for the UN Peace Mission in the Democratic Republic of the Congo (DRC). R147,510 will therefore remain for the Protection Support Detachment in Burundi. This implies that the current force levels of 1,500 will be scaled down to 459. However, due to the fact that the United Nations may become involved in the operation in Burundi, the DOD may not be required to provide the current level of deployed forces in any case. As the situation develops and the requirements from the UN become clear the DOD undertakes to keep the National Treasury informed about the financial requirements. The issue was also addressed at Defence’s appearance before the MTEC on 8 September 2004.
2. Capital Investments. Various legislative imperatives have impacted negatively on the ability of Defence to implement a capital replacement programme for the SA Army and SAMHS. Future scrutiny of legislation should also focus on the financial impact thereof on national departments and provincial and local governments.

FUNCTION SHIFTS

3. National Key Points. National Treasury was requested to note that there is an interdepartmental function shift between the DOD and the Department of Safety and Security with regard to the safeguarding of National Key Points.
4. Reduced Support to the SA Police Service. There is ongoing interaction between Defence and SAPS regarding Defence’s anticipated reduced involvement in internal deployments. Due to the sensitivity of the situation a first baseline adjustment will occur most probably in 2006/07 with a final baseline adjustment between Defence and Police in 2009/10 based on a phased reduction of Defence’s involvement in internal deployments and borderline control. During the MTEC deliberations the Committee indicated that in both cases (National Key Points and reduced support to the SAPS)it will be recommended to the MinComBud that the principle of funds follows function will not be applicable. This will allow Defence to reallocate the funds in accordance with identified priorities. Final approval is still outstanding.
5. Internal Function Shifts. Internal function shifts within Defence are being considered and will probably take place during the latter half of 2004/05. This will effect the current allocation of funds for the medium term between the various main and sub-programmes. This is the result of internal reorganisation to improve service delivery.

CHANGES TO THE PROGRAMME STRUCTURE, PURPOSE AND MEASURABLE OBJECTIVES

6. During the compilation and evaluation of the Defence Budget Proposal it was realized that the main programme, "Command and Control" (Programme 8) is not described appropriately. The proposed changes to the description of the main and sub-programmes, its purpose and measurable objectives were submitted to the National Treasury and is currently under discussion.

BASELINE MEDIUM-TERM ALLOCATION

7. Current Allocation. The current allocation for Defence is reflected in Table 2 below. Table 3 shows a summary of the allocation per main programme while detail per programme is discussed in subsequent paragraphs.

Table 2: Vote 22: Defence: 2005 Medium-Term Baseline Allocation

2005/06 R’000s	2006/07 R’000s	2007/08 R’000s
22,123,617	22,360,684	21,327,068

 

 

Table 3: Budget per Programme

Serial No	Programme	FY 05/06
		R’000	%
1	Administration	756,481	3.42%
2	Landward Defence	3,422,175	15.47%
3	Air Defence	2,310,604	10.44%
4	Maritime Defence	1,153,777	5.22%
5	Military Health Support	1,384,749	6.26%
6	Defence Intelligence	144,527	0,65%
7	Joint Support	2,381,602	10.76%
8	Command and Control	1,048,427	4.74%
9	Special Defence Account	9,521,275	43.04%
		22,123,617

8. Budget Composition. Tables 4 and 5 reflect Defence’s budget composition based on the economic classification of expenditure. Table 4 includes the allocation for the Strategic Defence Procurement Programme (SDP) and Table 5 excludes the allocation for the SDP.

Table 4: Economic Classification including the SDP

Serial No	Sub-Programme	FY 05/06
		R’000	%
1	Compensation of Employees	8,249,015	37.29%
2	Goods and Services	4,423,099	19.99%
3	Transfer Payments	324,388	1.47%
4	Payment for Capital Assets	9,127,115	41,26%
		22,123,617

Table 5: Economic Classification excluding the SDP

Serial No	Sub-Programme	FY 05/06
		R’000	%
1	Compensation of Employees	8,249,015	54.64%
2	Goods and Services	4,423,099	29.30%
3	Transfer Payments	324,388	2.15%
4	Payment for Capital Assets	2,100,493	13,91%
		15,096,995

9. Impact. The outcome and outputs of the updated White Paper on Defence and the Defence Review, will impact on the DOD organizational structures to improve efficiency and effectiveness and to identify and address the strategic gaps in the DOD within the context of Government’s priorities for the next decade. Once this process has been finalised specific cost-saving strategies and instructions will be issued to the Top Level Budget Holders of Defence, most probably during September 2005 for incorporation in the 2007/08 MTEF.

FUNDING OPTIONS

10. Policy Options. In preparing the equitable distribution of revenue amongst the three tiers of government, national departments may submit a maximum of four policy options reflecting its most critical spending pressures. The Department identified in excess of 300 risks with financial requirements. These risks were subsequently reduced to 17 options as reflected in the table 6.

Table 6. Options in Order of Priority

Serial	Service/ Division	Option	FY2005/06 R’000	FY2006/07 R’000	FY2007/08 R’000
	A	B	C	d	e
1	Joint Support 1	Ammunition Disposal	575 000	20 000	20 000
2	Joint Support 2	Facilities	275 000	440 000	620 000
3	SA Navy 1	Strategic Defence Package	47 516	40 000	31 400
4	SAMHS 1	Service to Policy Requirement	215 000	142 000	136 000
5	SAMHS 2	Service Partly Supporting Policy	177 000	132 000	131 000
6	SAMHS 3	Service Mostly Non-Compliant with Policy and Legislation	152 000	146 000	139 500
7	Defence Foreign Relations	MA Alignment with Government Objectives	28 029	32 337	39 013
8	SA Air Force 1	Inkwazi Operating Funds	19 616	19 616	19 616
9	Special Forces	Recruiting and Equipping	5 900	19 030	42 119
10	SA Army 1	MSDS	107 000	165 000	165 000
11	SA Army 2b	Ammunition Stock Levels (Minimum)	93 000	200 000	200 000
12	SA Navy 2	Compliance with Statutory Prescripts	80 000	50 000	16 500
13	SA Army 2a	Ammunition Stock Levels (Ideal)	332 300	332 300	332 300
14	SA Air Force 3a	Airbase Operational Infrastructure (Total)	157 580	-	-
15	SA Air Force 3b	Airbase Operational Infrastructure (Critical)	15 800	20 000	20 000
16	Military Legal Service	Personnel Retention	8 100	8 100	8 100
17	SA Air Force 2	AFS Ysterplaat Runway	24 200	-	-

11. Prioritised Requirements. Defence’s prioritised requirements and the preliminary recommendations of the MTEC to the MinComBud are reflected in Table 7.

Table 7. Policy Options

Policy option	2005/06		2006/07		2007/08
	DEPT R'000	MTEC R'000	DEPT R'000	MTEC R'000	DEPT R'000	MTEC R'000
Option 1: Ammunition disposal	10 000	5 000	80 000	10 000	80 000	50 000
Option 2: Facilities	275 000	10 000	440 000	50 000	620 000	250 000
Option 3: Integration of SDP	47 516	26 000	40 000	22 000	31 400	13 000
Option 4: Military Health Services	152 000	20 000	146 000	12 000	139 500	14 000
Total	484 516	61 000	706 000	94 000	870 900	327 000

 

 

12. Ammunition Disposal. The age and condition of the DOD stock of ammunition is a serious concern. The total stock is on average 19 years old. Almost 50% of the ammunition is in condition C (unusable but reworkable) and 7% in condition D (unusable and not reworkable). The risk of this ammunition being the cause of casualties, injuries or great damage to facilities is increasing daily.
13. It is estimated that 23 000 tons need to be disposed of immediately which will take ± 35 years using the conventional disposal method. The safety aspect with regard to warehousing, shelf life and operational use has reached a critical point where safety cannot be guaranteed any more.
14. Latest indications are that the construction of the Ammunition Disposal Plant will be financed through an Industrial Participation Programme and will take at least two years to construct. The earliest that disposal of DOD ammunition by this plant can be expected is therefore in the FY 2006/07 if construction commences in FY2004/05. In the meantime the reworking of unstable ammunition must continue to minimize the risk. The cost of reworking is estimated at R10 million per annum and operation of the plant at R80 million per annum.
15. Facilities. The historical backlog of maintenance on all Government owned facilities has necessitated the development by the National Department of Public Works (NDPW) of a specialized approach for the repair and maintenance of facilities. The intent of a comprehensive Repair and Maintenance Programme (RAMP) is to systematically eliminate the existing backlog of repair and inadequate maintenance activities.
16. NDPW conducted and completed the status quo investigations (Phase 1) on 69 bases / facilities as well as all bases / facilities on the southern side of Pretoria. The investigations indicated that an amount of R 3.4 billion would be necessary to implement the RAMP on these bases / facilities. If all the bases / facilities of the DOD were taken into consideration an estimated amount of R 10.5 billion would be needed to implement the RAMP on these bases / facilities.
17. The DOD will embark on a programme to reduce its facilities portfolio by at least 25%. If this were taken into consideration, an estimated R 7.9 billion would be needed over an implementation period of 10 years.
18. Integration of Corvettes and Submarines. The acceptance and integration of the Corvettes and Submarines into service is a complex process, which has led to many unforeseen and thus unplanned activities. In terms of international benchmarking this is not a new or strange phenomenon. The problem has been exacerbated by exchange rate fluctuations which have led to the "Customer Furnished Equipment and Services" Register growing at the expense of the SA Navy MTEF. This has led to a situation where the SA Navy now requires additional funding of less than one percent of the cost of the Strategic Defence Packages (Corvettes and Submarines), in order to ensure the contracted acceptance and integration of these platforms into service.
19. An additional serious, unforeseen and unavoidable constraint is being posed by the sub-specification functionality of the Naval Dockyard electricity supply system. This has resulted in an unplanned extended use of Corvette generators, which in turn impacts significantly on fuel consumption and spares usage.
20. Compliance with National Health Legislation. The SAMHS’s activities have been under-funded for a considerable time due to pressure on the DOD budget. A factor that is also disregarded is that the cost of health care has increased every year with at least 10% more than what the SAMHS was receiving as an increase. The effect of contractual obligations (service to SANDF members), government priorities and expectations and regulatory imperatives are further impacting on the expenditure.
21. Policy changes and Government incentives to retain scarce skills have a major impact on the SAMHS. The collective effect of scarce skills and rural allowance, legislative changes and Presidential requirements amount to around R90 million.. It must also be recognised that services provided to DOD personnel have a direct impact on force readiness and the ability to service Government priorities.
22. The Military Health Depot does not comply with new legislation. This fact and its impact is a long-standing point in request for funding. The deadline for compliance is less than a year away. If funding is not forthcoming the DOD will have no option but to apply for a non-compliance certificate approval. If this fails there will be no pharmaceutical support for patients in the DOD and for deployed forces.

CONCLUSION

23. In terms of the White Paper on Defence, the Defence Review and current deployments, Defence is under-funded. The result is that the 2005/06 MTEF plan is neither affordable nor sustainable due to the non-alignment of the obligations of Defence as stipulated in the White Paper and Defence Review and the Defence Allocation
24. It is foreseen that the updating of the White Paper on Defence and the Defence Review will have a crucial impact on the budget composition. It must however be noted that the full impact of this realignment will in all probability only become visible during FY 2006/07 and more so during FY 2007/08.
25. Defence remains committed to support Government initiatives, priorities and objectives. Additional funding as outlined above will make compliance with legislative imperatives possible and empower Defence to fully implement Government initiatives, priorities and objectives.