National Assembly:

2. Report of the Portfolio Committee on Defence, having conducted departmental hearings on the annual reports of the Department of Defence and Armscor on Tuesday, 19 October 2004, reports as follows:

1. INTRODUCTION

The Committee’s 19 October 2004 public hearing was part of its oversight of the Department of Defence and the Armaments Corporation of South Africa Limited (Armscor). The annual reports indicate the extent to which the reporting entities have achieved the objectives and measurable deliverables as stated in their strategic business plans. The reports include an internal audit of Armscor and an audit by the Auditor-General concerning the Department’s financial statements. This indicates the extent to which these entities have applied their business plans, whether government guidelines have been adhered to and whether expenditure has flowed from the strategic plans.

 

2. THE DEPARTMENT OF DEFENCE

2.1. Achievements

In general, it appears the Department has achieved its targets. The successful external and internal deployments of the South African National Defence Force (SANDF) are also deliverables according to the strategic plan. However, the Department has not completed an audit of the materials in its possession.

The Department has a ten-year plan to rejuvenate its infrastructure, which includes land, buildings, airfields, etc. Plans, including provision for public-private partnerships, were submitted to the Department of Finance and the Department of Public Works in May 2004.

2.2.Challenges

The Department faces a range of challenges, including the lack of an exit mechanism for older personnel and inadequate information technology (IT) systems. The IT systems now in use undercut the ability of the Joint Support Division, which integrates the four services, to manage information.

The Department’s strategic plan was compiled over the period of the Medium Term Expenditure Framework (MTEF) – that is, over three years – and therefore gaps developed between the strategic plan and execution due to changes in funding allocation. The SANDF has also had to contend with ageing equipment, which has kept maintenance costs high. As a result, the SA Air Force has not received a sufficient quantity of "air days" for training and operations, nor has the SA Navy received an adequate number of "sea days". The same problems apply to the SA Army and the Reserves.

Even though the services received their allocations, on occasion funding has had to be shifted between services or between units due to new or unforeseen priorities. This makes it difficult for the units to organise and to implement their plans.

The Department received a qualified report from the Auditor-General. Five reasons were given for the qualified report, but much of the problem results from the fact that the leave system has been changed from an accrual system to a "use it or lose it" system. The problem originated in the Department’s calculations for its 75 000 personnel. These calculations were made on a manual basis, as the Department did not have the funds to upgrade its IT systems. As a result, faults crept into the process. The IT system should have provided an early warning but failed to do so. The Department calculates that between R2 billion and R3 billion is needed to acquire an "off-the–shelf" IT system. The committee understands that the Treasury is assessing whether national departments should have the same system or different systems. A decision will be taken by 1 April 2005.

2.3 Comments by Members

Members expressed concern about the application of policy and procedure as they pertain to internal controls. This was raised in the Auditor-General’s report. External deployments have brought about a new system of procurement in the host countries. We understand the Department is beginning to manage this process, which is under review. While all high-value equipment is sourced in South Africa, and this is done in accordance with the Preferential Procurement Policy Act, items of lesser value are sourced in the host countries. The Department’s main priority is the successful management of the more than 3000 personnel deployed abroad. We also understand that the Department is the first to introduce an anti-fraud system to minimise losses through crime.

The Committee believes that there is a mismatch between current commitments and funding, but understands that this will be addressed. In the 1998 Defence Review it was envisaged that South Africa would use one battalion for peacekeeping, but today three are in use.

The Committee feels the Department has to report with greater precision. Members want the Department to define in detail certain phrases (e.g., "partially achieved") so that deliverables can be clearly measured. Detail is also required so that performance can be measured against that of previous years, as well as current planned objectives. The Committee believes there should be greater clarity as to how it was possible that adequate practice time (e.g., "air hours" in the case of the Air Force, or "sea hours" in the case of the Navy), could not be provided for members of the respective services.

3. ARMSCOR

3.1 Achievements

Armscor received a 19% (R30 million) increase in its transfer payment from the Department. This will alleviate budgetary constraints. This amount covers 61% of the operating budget. A portion of the allocation will be invested in transformation programmes. The average increase of the transfer payment over the next two years will be 12,4% compared to 5,3% for the past five years.

The progress of the strategic defence packages is on track under the professional acquisition management of Armscor. Seventy three percent of the defence industrial participation programme obligations are accounted for by the strategic defence packages. These contracts are on schedule.

3.2 Challenges

Armscor’s personnel target is to employ a staff that is 80% black (African, Indian and Coloured) and 43% women. However, Armscor says that this goal is difficult to achieve and maintain because it operates in an environment in which engineering and technical skills are scarce, especially among blacks.

Armscor wants Denel to be cost and product competitive, and therefore cannot give preference to Denel over competitors in the local defence industry, even though both are parastatals.

Armscor lacks personnel in, for example, the aircraft and electronic warfare division due to staff moving to the private sector for higher salaries. This causes an erosion of technical capabilities, and contributes to lack of transformation, increased workload and inability to recapitalise the organisation.

3.3 Comments by Members

Members queried the absence of an Auditor-General’s report, but were informed that there was no separate Auditor-General’s report for Armscor, because the report on the Special Defence Account formed part of the Department’s annual report. The Committee believes that the relationship between Armscor (especially Armscor Business) and Denel, as well as Armscor and the broader defence industry, needs further attention.

4. CONCLUSION

The Committee noted the submissions by the Department and Armscor.