Procurement of Heberon from Cuba: Minister & Deputy response to MTT findings; Analysis of Defence Portfolio APP & Budget

Meeting report

The Chairperson welcomed everyone to the meeting and outlined the meeting agenda.

He then invited the Minister of Defence and Military Veterans, Ms Thandi Modise, to provide the briefing on the report by the Ministerial Task Team.

Opening remarks

Briefing by the Minister of Defence and Military Veterans on the Departmental Responses to the findings of the Ministerial Task Team (MTT) on the Procurement of Heberon Medication from Cuba by the DOD

The Minister greeted everyone and introduced her team. She said the Department had discussed the MTT report and found that whilst the problems at hand could be attributed to the COVID-19 pandemic, there were things that could have been done differently to avoid transgressing South African law, especially the financial processes within the Department. While the DOD was trying to do the right thing by securing supplies for the troops, its conduct overlooked the country’s laws on importation. For instance, the MTT found that the first consignment was brought into the country through a subsidiary of Armscor and that the second and third consignments were never cleared. Consequently, such consignments were classified as smuggled because they were not cleared. The MTT report also implicated three officials, one of whom was the former Secretary-General (SG). This matter was discussed with the Chief of the South African National Defence Force (SANDF), General Rudzani Maphwanya, and he was instructed to implement decisions.

Apart from this, the Minister commended the honesty and hard work demonstrated by Mr Eric Sokhela, the DOD’s Chief Financial Officer (CFO). He was the first to identify that the consignment of interferon drugs was brought in under false classifications which he refused to allocate funds for. However, senior officials in the logistics department put pressure on a junior Finance Manager to facilitate the allocation of these funds. The Minister then instructed the SANDF Chief to act on this official and all the members that were involved in this act.

The Minister said the MTT, together with the Auditor-General of South Africa (AGSA), recommended the return of these drugs before their expiry date. While on the other hand, the Department received an ultimatum from the South African Health Products Regulatory Authority (SAPHRA) to return them or it would seize and destroy them. Although a report was issued stating that the drugs in the storage facilities had been delivered to Cuba, there were still some consignments left which were yet to be delivered. She disclosed this information to express her commitment to transparency as a public representative and encouraged all members acting on behalf of the government to carry out their duties with integrity. While the Department appreciated SAPHRA’s efforts to correct this issue, an ideal system would have been where the processes within the Department were followed properly, and where there was coordination with relevant government structures. To this end, efforts were being made to engage the Minister of Health, Dr Joe Phaahla, about delays by his department. The DOD might have been able to at least bring in the last two consignments of drugs legally and to have them tested to ascertain whether interferon, in particular, worked or not. She hoped that by the next meeting the Department would have a report from the SANDF Chief on what had been done to address the issues raised.

Discussion
The Chairperson thanked the Minister for the briefing and said the Committee would wait for feedback, particularly from the SANDF Chief, on how these matters were dealt with. He then invited Committee Members to comment on the briefing.

Mr S Marias (DA) thanked the Minister for her honest and sincere briefing. He supported her decision to engage the SANDF Chief to address internal matters concerning uniformed members as this was not her jurisdiction. However, he said the Department had to consider terminating Operation Thusano soon as it was irregular and wasteful expenditure currently and potentially in the future. He also pointed out that there were still some uncertainties as to the role of the Deputy Surgeon-General. He added there was a need for the Department to rectify the public image of the SANDF as being a disciplined force like it was done in the previous year in KwaZulu-Natal.

Mr T Mmutle (ANC) thanked the Minister for her briefing and all her efforts to ensure that the matter at hand was addressed. He asked for clarity on the processes that were involved in returning the drugs to Cuba, particularly those that had been paid for. The drugs had become property of the SANDF, therefore, returning them back to Cuba demanded a process of disposal in order to get back whatever resources had been spent on them. Was this process followed?

The Minister thanked the Committee for its comments. She expressed her appreciation for the former Minister, Ms Nosiviwe Mapisa-Nqakula, who initiated the establishment of the MTT. By the time she took office, investigations were already underway. She acknowledged that Operation Thusano was implicated in this matter although initially, it had nothing to do with this. Since the report was not yet complete, she pleaded with the Committee to give her additional time because Operation Thusano was part of the investigations. Once again, she praised Mr Sokhela for standing firm when confronted by these fraudulent activities. Had he not done so, the Department would have been in a much bigger financial mess. In addition, the junior financial manager who was coerced to facilitate the payment wished to be exonerated from this issue as he had no choice but to follow instructions. However, all this was under investigation and as soon as the SANDF Chief provided feedback she would be in a position to address some of the questions asked in the meeting.

She replied that all processes were cleared, therefore, it is hoped that the reversal of the transaction in question would not be written off as a loss or a financial misdemeanour. She described this situation as a big lesson for the DOD. In the future, the law had to be followed. China had offered to donate a similar drug to South Africa but she informed the Chinese Minister of Defence to hold on to this gift while the DOD addressed the matter under discussion. Finally, she said the civilian component of this issue was equally a priority and that it was going to be addressed as soon as the official designated to deal with it returned to their duties.

The Chairperson thanked the Minister for her detailed response and supported her commitment to instil transparency within the DOD.

Mr Marias interjected and requested if the Minister could ask the Chief General to comment on the role played by Major General Lesley Ford who also actively tried to stop this fraudulent practice. The Committee was proud of individuals like him, the Surgeon General and Mr Sokhela who demonstrated immense integrity in the conduct of their duties.

The Chairperson agreed to this suggestion and emphasised that whistleblowers play a vital role in bringing such matters to the attention of the Committee and the Department. He then invited the Minister to make her final comments.

The Minister said there was not much that she wished to add but just to point out that in every situation and experience, there is a lesson to be learnt.

The Chairperson then thanked and released the Minister and the Deputy Minister from the meeting.

Committee Second Term Programme

The Chairperson summarised the programme and invited the Committee to comment on it.

Mr Marias said the programme was quite full considering the time that the Committee had. He noted that most of the items seemed like statutory obligations. It would have been prudent to see other matters being raised like the appointment of members of the Defence Force Service Council (DFSC) and the suspension of members that were implicated in the Cuban case. It was important for the Committee to receive feedback on such matters. Ongoing projects were also worth including in the agenda. For instance, there were rumours that Armscor was busy with upgrading the frigates in Simonstown. He also pointed out that the Committee had oversight over the Minister and that it would be beneficial if she could brief the Members on her Performance Contract with the President. Matters involving proceedings of the Lekgotla were also worth incorporating into the proposed agenda.

The Chairperson replied that the DFSC was present in the proposed agenda. He said the Committee was going to be dealing with the budget, so Mr Marias was welcome to ask any questions concerning ongoing projects if he wished. On the suspension of members, the matter was still under consideration. The Committee was going to address it once it received a comprehensive report from the SANDF Chief. He pointed out that the Lekgotla coincided with the Committee’s forthcoming meeting. For that reason, the Committee was to shift its business to the evening to create space for the Lekgotla which was going to be held in the morning. He added that the Minister’s Performance Contract was incorporated into the Annual Performance Plan. It was therefore not clear what Mr Marias was asking for. He asked if he could motivate further why he wanted the Minister’s Performance Contract to be held as a separate item.

Mr Marias replied that he was not aware of the point that the Chairperson raised. At this point, it was an assumption and having the Minister brief the Committee on her Performance Contract was an opportunity for the Committee to hold her accountable.

The Chairperson replied that he was sure that his explanation was how the executive operated. It was impossible to finalise an Annual Performance Contract before hearing what the President wanted one to do for the financial year. However, Mr Marias had room to enquire what was in the Performance Contract once the annual plan is tabled.

DOD Budget and APP Analysis: Aspects for Parliamentary Oversight Consideration

Dr Wilhelm Janse van Rensburg, Committee Researcher, greeted everyone and explained that the goal of the presentations is to assist the Committee in its upcoming meetings where it would be carrying out oversight on the two departments and entities and submitted budgets and Annual Performance Plans for the 2022/23 financial year. DOD’s allocation for the 2022/23 financial year was R49 billion. This was slightly higher than the adjusted appropriation of R48 billion for the 2021/22 financial year. There was a nominal increase of 0.6% and a decrease in real terms by 3.7%. He listed some of the key cost drivers for the DOD. The first was the compensation of employees. About R30 billion was allocated for this purpose yet the expected expenditure was approximately R33 billion. This was 68.7% of the Department’s annual budget. An estimated R3 billion was expected to go to irregular expenditure. The other aspect was the contractors. In the previous years, funds allocated for such purposes were on average around R1.6 billion per year. However, for the current financial year, it was R2 billion. Even though it was a decrease from the previous year of R3 billion, it was still higher than usual. Employee social benefits, the Special Defence Account, fuel, oil, and gas and operating leases were all listed among the major cost drivers for the Department.

Dr van Rensburg broke the meeting down into two key oversight focus areas. The first was the long-term macro budget and the other one was the medium-term micro-budget. Using these two perspectives, he said focusing on the long term was important for the Committee in its oversight to assess how the current budget contributed to the long-term sustainability of the Department. Likewise, looking into the short term was equally important as its addressed immediate issues like leakages that caused wasteful expenditure in the current budget. In conclusion, he said the Department’s allocation remained stagnant with little scope for growth amid fiscal constraints. Further, the oversight of Ministerial intervention needed to ensure that capabilities were maintained, and that oversight of specific expenditure required to ensure frugal expenditure amid fiscal constraints. He also said re-balancing of the COE could require more speedy resolutions, and that all efforts had to work towards a sustainable and capable SANDF.

Discussion
Mr Marias applauded Dr van Rensburg for the very insightful presentation. However, considering the Department’s commitment to Operation Notlela - an additional R2.9 billion to the budget, how was the project going to be funded?

The Chairperson replied that any commitment adopted after the budget had been presented was to be considered during the adjustments process. However, questions could still be asked about how the current budget was going to sustain this commitment considering that the adjustment was only going to occur much later in the year.

DMV 2022/23 Budget and APP Analysis.

Mr Peter Daniels, Committee Content Advisor, listed the main issues in the APP. Among them was initiating job creation for Military Veterans through skills development and training to ensure that they were less reliant on the Department. Other issues that were to be closely monitored were the development of regulations for the Advisory Council, the Appeal Board and the South African National Military Veterans Association. There were also new developments in the development and implementation of the integrated Database Management System, as well as the benchmarking for medical cover and costing exercise for a low-cost medical scheme. He said the analysis report also looked into what the Minister and the Deputy Minister meant by “Economic Transformation” and “Social Wages”. It also looked into why the Department’s target was to maintain an unqualified audit opinion instead of a clean audit opinion. As already highlighted, the Department sought to empower Military Veterans in order to make them less reliant on the Department. What were the timelines and envisaged costs?

Mr Daniels pointed out that there was a 4.45% increase in the 2022/23 budget. These increases were mostly in Programmes 1 (Administration) and 2 (Socio-economic support). Programme 3 (Empowerment and Stakeholder Management) had a 8.75% decrease. Finally, the report examined if mitigation strategies implemented for risks were working.

Discussion
The Chairperson thanked Mr Daniels for the detailed presentation. It shed light on where the Committee had to channel its focus. He asked if it was possible during the analysis to have a comparison of when the Department was operating optimally and the current period when it was not? This could help the Committee ascertain how much the erosion of the budget had affected the performance of the Department.

Mr Daniels agreed to compile an additional document that would address the Chairperson’s questions before the next meeting.

Mr Marias pointed out that many military veterans complained about pensions. Was this addressed in the report. The Military Veterans Act provided expectations for the Military Veterans yet these expectations were hardly met. He asked if Mr Daniels had looked into these legislative expectations and how they could be mitigated. More so, whether the Annual Performance Plan provided for these shortcomings.

Mr Daniels replied that the Department was working closely with the National Treasury and the Government Employees Pension Fund (GEPF) to address the matter concerning pensions. He also said the new Director-General of the DOD, Ms Sonto Kudjoe, was committed to improving things in the Department.

Armscor 2022 Budget and Corporate Plan Analysis (CPA)

Dr van Rensburg pointed out that the Armscor Board Chairperson acknowledged that the entity could deliver but had several challenges that included a declining defence budget, diminishing capability of Denel and IP theft by various parties. He recommended the Committee follow up on this during its oversight. Similarly, the Armscor Chief Executive Officer identified focused areas to optimise operations. These included the Armscor Commercialisations Strategy, revenue generation, cost management, efficient and effective delivery, stakeholder management and Armscor as a procurement partner for the Security Cluster. Since the Committee was going to conduct an oversight on Armscor in the following week, he recommended that this was an ideal opportunity for the Committee to engage the entity to ascertain the feasibility of commercial opportunities listed here.

In the Armscor Strength, Weakness, Opportunities and Threat (SWOT) Analysis, Dr van Rensburg found that the entity lacked business acumen and slow conversion rate of business opportunities. In terms of threats, Denel's sustainability and current performance were worth noting. This included the general performance of the industry and the reliance on insufficient DOD transfer payments. Opportunities on the other hand were to expand existing capacity to meet emerging demand in targeted geographies. He broke down the main sources of income for Armscor. The first was the R1.5 billion it received from the DOD. From Net sales, it received R581.3 million and R92.8 million from other income. It also received R23.7 million from recoveries.

Dr van Rensburg listed the main cost drivers for the entity and these included personnel costs, external services, water and electricity, computer services, subsistence and travel as well as publication and advertising. He said the projected income for the Armscor Group in the 2022/23 financial year was lower than the one projected for the 2021/22 financial year. After the inclusion of depreciation, Armscor was expected to have a net shortfall of R16.1 million for 2022/23. He said it was also important for the forthcoming oversight to look at the entity’s strategies to generate savings and income. Since 2019 it employed the strategy of sweating its assets. Why was there no progress? Armscor was also said to have reduced its personnel. However, whilst this could have saved on costs for the entity, usually, most of the individuals leaving were senior and skilled personnel. It was recommended that the Committee probe this further. He commended some of the targets that Armscor had listed in its annual performance plan. However, there were some questions around some of them. For example, it put a 95-day target for off the shelf products to be procured. This was quite long to prepare something off the shelf. There was also a reduction in its research and development income from R330 million in the previous year to R206 million in this year. Perhaps an explanation should be given to explain why there was such a big reduction plan for the year. There was also slow global growth in revenue from the Business Enablement Units for the coming year. The projected amount was R31 million for the coming year, but in the previous year only achieved 17 million. It was therefore important for the Committee to dig a bit deeper into the work of the Business Enablement Unit.

CCB Budget and APP Analysis

Mr Daniels said the main issues were the COVID-19 pandemic and its impact on planning and delivery, challenges with the Going Concern Status, health, safety and security concerns, challenges to ensure the precinct was operationally managed solely by the CCB, and, among other things, employment being the most significant expenditure driver. When looking at the situational analysis, one would see that there were ongoing talks with the Department of Sports and Culture to refund the CCB. He also pointed out that the CCB claimed that it was not receiving funds from the national fiscus despite the existence of legislation permitting the organisation to receive such funds. Notwithstanding these claims, what had the entity done to get these funds from the national fiscus? Another area to probe was what the entity had done to operate the prescient alone? He listed some of the CCB’s objectives and one of them was that it wanted to achieve 97% on accountability. Why not 100%? He also recommended the Committee request more clarity on the entity’s definition of irregular expenditure labelled as “erratic nature of breakages”. Examples needed to be presented as well as the actual costs. He said it was also important for the entity to clearly distinguish between the Medium-Term Expenditure Framework, the annual targets and the contributions by the DOD.

He said it was important for the Committee to monitor the CCB’s programmes. For Programme 1, it was important to monitor, among other things as listed in the slides, the five-year target, irregular, fruitless and wasteful expenditure. For Programme 2, to monitor maintenance and conservation activities. Programme 3, he recommended the Committee find out what the CCB was doing to find other means to attract visitors now that the pandemic was subsiding. For Programme 4, he said it was hoped that the increased access to the castle would significantly impact the number of visitors. Here he also hoped that the target of appointing interns would be met. In terms of Programme Resource Considerations, he illustrated how the expenditure of the CCB had increased since the last financial year. In the final slide, he recognised that the CCB had basically copied sections from its previous report which was unacceptable. He was concerned if due diligence was put to this section of its report.

Discussion
The Chairperson thanked Dr van Rensburg and Mr Daniels for their presentations. He said their inputs helped the Committee to prepare for the ensuing meetings. He asked if Dr van Rensburg’s presentation on Amscor related to what the President said in the State of the Nation Address (SONA). This was based on the analysis that Dr Janse Van Rensburg had presented on the impact of the SONA on the DOD.

Dr Janse Van Rensburg replied that normally that would be included in the beginning of the presentation. However, due to time constraints, he omitted that section for this meeting. He promised to incorporate this information into the document that he was going to submit to the Committee.

Closing remarks
The Chairperson asked to defer the minutes to the next meeting due to connectivity problems by the Committee Secretary. He further instructed the Secretary to compile the apologies into the meeting report as this was also not possible due to network problems. He mentioned that he was not going to be attending the next oversight visit. Then finally, he thanked everyone for attending the meeting.

The meeting was adjourned.