VOTE 22 Defence and Military Veterans Annual

VOTE : 22 Defence and Military Veterans Annual Audited Financial Statements For the year ended 31 March 2012

Scope p p p p p Purpose of the presentation Breakdown of Appropriation Revenue Composition of expenditure by programme Appropriation statement per SCOA Statement of Financial Performance and analysis of changes Statement of Financial Position and analysis of changes Statement of changes in Net Assets Cash Flow Statement Departmental revenue Expenditure on compensation of employees Expenditure on goods and services Payments for financial assets Debtors Irregular Expenditure Assets Auditor General’s Report – GDA SDA 2010/11 & 2011/12 Auditor General’s Report – SDA 2

Purpose The purpose of the presentation is to present Defence’s 2011/12 Annual Financial Statements and the Report of the Auditor General on this statements to the Portfolio Committee for Defence for the year ended 31 March 2012. 3

Breakdown of Appropriation Revenue Programmes R'000 Actual Funds Received 2011/12 R'000 Appropriation Received 2010/11 R'000 Administration 3 764 768 3 387 775 11. 1% Force Employment 2 358 515 2 265 457 4. 1% Landward Defence 10 962 193 9 295 568 17. 9% Air Defence 6 527 742 5 488 936 18. 9% Maritime Defence 2 574 714 2 349 916 9. 6% Military Health Support 3 400 096 3 150 334 7. 9% 653 113 633 853 3. 0% 4 107 946 3 870 752 6. 1% 34 349 087 30 442 591 12. 8% - Defence Intelligence General Support Total Final Appropriation 4

Composition of expenditure by programme Defence Intelligence 3. 0% General Support 6. 1% Military Health Support 7. 9% Administration 11. 1% Force Employment 4. 1% Administration Force Employment Landward Defence Air Defence Maritime Defence Military Health Support Defence Intelligence Maritime Defence 9. 6% General Support Landward Defence 17. 9% Air Defence 18. 9% 5

Current payment 3, 669, 353 3, 652, 874 99. 6% 3, 307, 355 Transfers and subsidies 34, 012 32, 841 96. 6% 32, 368 Payment for capital assets 34, 017 100. 0% 29, 091 Payment for financial assets 2. 27, 386 3, 764, 768 27, 386 3, 747, 118 100. 0% 18, 961 3, 387, 775 18, 961 3, 387, 775 Force Employment 2, 037, 432 100. 0% 2, 011, 507 202, 787 100. 0% 139, 151 118, 286 100. 0% 114, 654 10 100. 0% 145 2, 358, 515 2, 265, 457 8, 867, 194 100. 0% 8, 568, 056 1, 795, 945 100. 0% 496, 613 295, 063 100. 0% 226, 583 3, 991 100. 0% 4, 316 10, 962, 193 9, 295, 568 4, 599, 263 100. 0% 4, 040, 974 1, 869, 640 100. 0% 1, 400, 474 58, 414 100. 0% 42, 066 425 100. 0% 5, 422 6, 527, 742 0. 0% 5, 488, 936 Current payment Transfers and subsidies Payment for capital assets Payment for financial assets 3 Landward Defence Current payment Transfers and subsidies Payment for capital assets Payment for financial assets 4 Air Defence Current payment Transfers and subsidies Payment for capital assets Payment for financial assets 6

Appropriation per Programme 4 5 6 7 8 Air Defence Current payment Transfers and subsidies Payment for capital assets Payment for financial assets Maritime Defence Current payment Transfers and subsidies Payment for capital assets Payment for financial assets Military Health Support Current payment Transfers and subsidies Payment for capital assets Payment for financial assets Defence Intelligence Current payment Transfers and subsidies Payment for capital assets Payment for financial assets General Support Current payment Transfers and subsidies Payment for capital assets Payment for financial assets Expenditure as % Final Actual of final Final Actual Appropriation Expenditure appropriation Appropriation Expenditure 4, 599, 263 100. 0% 4, 040, 974 1, 869, 640 100. 0% 1, 400, 474 58, 414 100. 0% 42, 066 425 100. 0% 5, 422 6, 527, 742 0. 0% 5, 488, 936 2, 095, 632 100. 0% 1, 912, 053 443, 590 100. 0% 378, 061 35, 240 100. 0% 58, 957 252 100. 0% 845 2, 574, 714 0. 0% 2, 349, 916 3, 292, 936 100. 0% 3, 026, 415 16, 326 100. 0% 38, 551 38, 331 89, 278 100. 0% 82, 673 1, 556 100. 0% 2, 695 3, 400, 096 0. 0% 3, 150, 334 3, 150, 114 239, 947 100. 0% 222, 359 409, 345 100. 0% 404, 627 3, 719 100. 0% 6, 862 102 100. 0% 5 653, 113 0. 0% 633, 853 2, 452, 366 100. 0% 2, 458, 243 1, 107, 368 100. 0% 998, 392 343, 276 100. 0% 279, 507 204, 936 100. 0% 134, 610 7 4, 107, 946 0. 0% 3, 870, 752

Analysis of Changes p Increase in programme Administration due to the increase in the devolved funds from NDPW and salary increases together with the implementation of the new defence force remuneration systems. p Increase in programme Landward Defence due to the maintenance of the current defence capabilities. p Increase in programme Air Defence mainly due to the maintenance of the current defence capabilities. p Increase in programme Maritime Defence due to the maintenance of the current defence capabilities. p Increase in programme Military Health Support due the maintenance of the current defence capabilities. 8

Analysis of Changes p Increase in programme Defence Intelligence due to the implementation of the new defence force remuneration systems. p Increase in programme General Support due to the implementation of the new defence force remuneration systems. p Increase in programme Force employment due to the strengthening and consolidation of border safeguarding as well as sustaining peace missions as per Cabinet decision. 9

Appropriation per Economic classification Final Actual Appropriation Expenditure R'000 2010/11 Expenditure as % Final Actual of final Appropriation Expenditure appropriation R'000 Compensation of employees 17, 577, 366 17, 568, 980 100. 0% 16, 597, 098 Goods and services Interest and rent on land Transfers and subsidies Provinces & municipalities 9, 676, 559 9, 668, 466 - 99. 9% 8, 949, 864 0. 0% - - Departmental agencies & accounts Universities & technikons 4, 879, 109 4, 877, 938 - 100. 0% 3, 024, 728 0. 0% - Foreign governments & international organisations - 0. 0% - Public corporations & private enterprises Non-profit institutions 890, 749 6, 317 100. 0% 737, 510 100. 0% 5, 407 5, 187 Households Gifts and donations Payments for capital assets 102, 838 - 100. 0% 120, 592 0. 0% - Buildings & other fixed structures 279, 685 100. 0% 251, 203 Machinery & equipment Heritage assets Specialised military assets Biological assets Land & subsoil assets Software & other intangible assets 697, 108 - 622 - 76 100. 0% 581, 388 0. 0% - 0. 0% 7, 599 100. 0% 71 0. 0% - 100. 0% 132 Payment for financial assets 238, 658 100. 0% 166, 999 Total 34, 349, 087 34, 331, 437 99. 9% 30, 442, 591 30, 442, 371 R'000 Current payments % 10

Analysis of Changes p Increase in Compensation of employees due to improvements in conditions of service for soldiers and Military skills development initiative. p Increase in Goods and Services due to higher expenditure on Advertising, Entertainment (Military Attaches), Audit costs (Forensic and SDA - 2 years), Property payments, Venues and facilities and other operating expenditure (Aircraft chartering). p Decrease in transfers and subsidies to households due to the decrease in the number of officials exiting the department through EISP and MEM. p Increase in transfers and subsidies to departmental agencies and accounts due to SDA allocation. p Increase in transfers and subsidies to public corporations and private enterprises due to additional transfer made for the Navy Dockyard. 11

Analysis of Changes p Increase in transfers and subsidies to non-profit institutions due to yearly adjustments. p Increase in buildings and other fixed structures due to the upgrading of the runway at AFB Waterkloof. p Increase in machinery and equipment due to acquisition of UHF tactical equipment, warrior shelters systems and ambulances for the presidential Military Unit. p Decrease in Specialised Military Assets due to the reclassification of capital assets expenditure to inventory. p Increase in payment for financial assets due to unauthorised expenditure written-off. 12

DEPARTMENT OF DEFENCE AND MILITARY VETERANS VOTE 22 Statement of Financial Performance for the year ended 31 March 2012 Note 2011/12 R'000 2010/11 R'000 1 2 34 349 087 4 269 010 38 618 097 30 442 591 689 688 31 132 279 3 4 17 568 980 9 668 466 27 237 446 16 597 098 8 949 864 25 546 962 Transfers and subsidies 6 5 877 842 3 888 017 Expenditure for capital assets Tangible capital assets Software and other intangible assets Total expenditure for capital assets 7 7 977 415 76 977 491 840 261 132 840 393 Payments for financial assets 5 REVENUE Annual appropriation Departmental revenue TOTAL REVENUE EXPENDITURE Current expenditure Compensation of employees Goods and services Total current expenditure 238 658 TOTAL EXPENDITURE 34 331 437 15 16 30 442 371 4 286 660 NET SURPLUS FOR THE YEAR Reconciliation of Net Surplus for the year Voted Funds Departmental revenue NET SURPLUS FOR THE YEAR 166 999 689 908 17 650 4 269 010 4 286 660 220 689 688 13 689 908

Analysis of Changes p Increase in departmental revenue due to the deposit refund in cancellation of the A 400 contract. p Increase in expenditure on Compensation of employees due to annual salary increases. p Increase in Transfers and Subsides mainly due to the increase in SDA allocation. p Increase in expenditure on Tangible capital assets due to the upgrading of the runway at AFB Waterkloof. p Decrease in expenditure on Software and other intangible assets due to upgrade done in 2010/11 FY. 14

DEPARTMENT OF DEFENCE AND MILITARY VETERANS VOTE 22 Statement of Financial Position as at 31 March 2012 Note 2011/12 2010/11 R'000 8 669 026 60 918 741 344 60 918 Fruitless and wasteful expenditure 9 20 29 Cash and cash equivalents 10 64 557 61 932 Prepayments and advances 11 131 620 75 293 Receivables 12 399 549 530 810 Loans 14 12 362 13 75 000 744 026 816 344 15 ASSETS Current assets Unauthorised expenditure Non-current assets Investments TOTAL ASSETS

DEPARTMENT OF DEFENCE AND MILITARY VETERANS VOTE 22 Statement of Financial Position as at 31 March 2012 LIABILITIES Current liabilities Voted funds to be surrendered to the Revenue Fund Departmental revenue to be surrendered to the Revenue Fund 16 599 428 220 2 639 15 492 376 17 650 4 139 - 538 000 Bank overdraft 17 - 403 800 Payables 18 68 287 57 069 TOTAL LIABILITIES 492 376 599 428 NET ASSETS 251 650 216 916 Represented by: Capitalisation Reserves 75 000 Recoverable revenue 176 650 141 916 251 650 216 916 16 TOTAL

Analysis of Changes p Increase in cash and cash equivalents due to the increased need for cash in operational areas as well as inflation. p Increase in prepayments and advances due to backlog in S&T advances in international operations. p Decrease in receivables due to Unauthorised expenditure written off (Positive). p Increase in Voted funds to be surrendered due to under spending largely in Military Veterans environment. p Decrease in bank overdraft also due to Unauthorised Expenditure written off which was financed by the bank overdraft (Positive). Increase in Payables due to invoices received at year end which could not be paid on time p 17

DEPARTMENT OF DEFENCE AND MILITARY VETERANS VOTE 22 Statement of Changes in Net Assets for the year ended 31 March 2012 Note 2011/12 2010/11 R'000 75 000 Capitalisation Reserves Opening balance Other movements Closing Balance - 75 000 141 916 131 404 34 734 10 512 Irrecoverable amounts written off (2 329) (3 326) Debts revised Debts recovered (included in departmental receipts) (7 207) (5 975) (106 249) (27 135) Debts raised 150 519 46 948 Closing balance 176 650 141 916 TOTAL 251 650 216 916 Recoverable revenue Opening balance Transfers 18

DEPARTMENT OF DEFENCE AND MILITARY VETERANS VOTE 22 Cash Flow Statement for the year ended 31 March 2012 Note CASH FLOWS FROM OPERATING ACTIVITIES Receipts Annual appropriated funds received Departmental revenue received Payments Net decrease/(increase) in working capital Surrendered to Revenue Fund Current payments Payments for financial assets Transfers and subsidies paid 2010/11 R'000 38 539 178 34 349 087 4 190 091 31 109 211 30 442 591 666 620 86 161 (4 270 730) (27 237 446) ( 238 658) (5 877 842) (37 538 515) 1 2 2011/12 R'000 175 860 ( 688 929) (25 546 962) ( 166 999) (3 888 017) (30 115 047) Net cash flows available from operating activities 19 1 000 663 994 164 CASH FLOWS FROM INVESTING ACTIVITIES Payments for capital assets Proceeds from sale of capital assets Net cash flows from investing activities 7 2. 4 ( 977 491) 78 919 ( 898 572) ( 840 393) 23 068 ( 817 325) 34 734 13 837 136 825 ( 476 068) ( 339 243) 190 676 ( 666 744) 19 ( 476 068) CASH FLOWS FROM FINANCING ACTIVITIES Increase/(decrease) in net assets Net cash flows from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 20

Departmental Revenue 2011/12 2010/11 R'000 Sales of goods and services other than capital assets Fines, penalties and forfeits Interest, dividends and rent on land Sales of capital assets Transactions in financial assets in liabilities Transfer received Departmental revenue collected 292 210 263 989 894 162 779 4 459 10. 7% -80. 0% 2 628 6094. 0% 78 919 23 068 242. 1% 3 374 002 144 777 2230. 5% 360 206 250 767 43. 6% 4 269 010 689 688 519. 0% 20

Analysis of Changes p Increase of goods and services other than capital assets due to increase in receipts for board and lodging and housing rent. p Decrease in fines, penalties and forfeits due to the Garnishee orders receipts not being recognised as revenue. p Increase in sales of capital assets due to more obsolete and redundant assets sold. p Increase in financial assets and liabilities due to forex gain in the cancellation of A 400 transaction. p Increase in transfers received due to more funds received from the United Nations for participation in Peace Support Operations. 21

Compensation of Employees 2011/12 R'000 2010/11 R'000 7. 0% 11 220 960 10 483 192 Salaries and wages Basic salary Performance award -99. 8% 215 111 480 3. 8% 50 464 48 598 Compensative/circumstantial -5. 9% 1 716 919 1 825 212 Other non-pensionable allowances 14. 1% 2 704 915 2 371 257 5. 8% 15 693 473 14 839 739 Service Based Total Social contributions Employer contributions Pension 6. 3% 1 773 449 1 669 043 Medical 15. 7% 101 379 87 650 Bargaining council 2. 0% 679 666 Total 6. 7% 1 875 507 1 757 359 Total compensation of employees 5. 9% 17 568 980 16 597 098 Average number of employees 2. 2% 78 824 77 125 22

Analysis of Changes p Increase in basic salary due to annual increases and the new remuneration system. p Decrease in performance awards due to new system being implemented which resulted in no bonuses paid. p Increase in other categories related to the new Military Salary Dispensation and the general salary increase. 23

Goods and Services 2011/12 R'000 2010/11 R'000 Administrative fees 6 243 10 318 -39. 5% Advertising 6 874 5 553 23. 8% 130 850 108 647 20. 4% Catering 35 936 38 016 -5. 5% Communication 94 130 88 873 5. 9% 861 234 856 280 0. 6% 4 220 838 3 999 364 5. 5% Assets less then R 5, 000 Computer services Consultants, contractors and agency/outsourced services Entertainment 10 620 9 170 15. 8% Audit cost – external 56 432 49 972 12. 9% 1 929 175 1 787 881 7. 9% Inventory 24

Goods and Services- Continued 2011/12 R'000 2010/11 R'000 Operating leases 248 777 259 120 -4. 0% Property payments 761 584 580 930 31. 1% Travel and subsistence 733 171 728 501 0. 6% 19 515 9 972 95. 7% Training and staff development 127 520 118 977 7. 2% Other operating expenditure 425 567 298 290 42. 7% 9 668 466 8 949 864 8. 0% Venues and facilities Total 25

Analysis of Changes p Decrease in administrative fees due to large amounts paid to travel agencies for the 2010 FIFA World Cup in the previous year. p Increase in advertising due to an approved advertising campaign including billboards and other media. p Increase in entertainment expenditure is due to increased diplomatic ties with foreign countries. p Increase in audit cost due to forensic audits and SDA audit for two financial years. 26

Analysis of Changes p Increase in property payments due to increase in municipal taxes, rental and electricity. p Increase in venues and facilities due to increased number of seminars and symposia held. p Increase in other operating expenditure mainly due to aircraft chartering. 27

Payments for Financial Assets 2011/12 R'000 5. 2010/11 R'000 235 572 158 873 48. 3% 2 585 2 199 17. 6% 501 5 927 -91. 5% 238 658 166 999 42. 9% Payments for financial assets Other material losses written off Debts written off Forex losses Total 5. 1 Other material losses written off Nature of losses Settlement 1, 575 4, 811 Miscellaneous 2 - Motor vehicle losses 1, 569 1, 714 -8. 5% Other claims against the state 358 442 -19. 0% Legal opinions 2, 462 4, 068 -39. 5% Legal fees 25, 471 18, 540 37. 4% Interest claims - 29 -100. 0% Fruitless and wasteful expenditure 1 880 -99. 9% Spectacle losses - 3 -100. 0% Unauthorised expenditure written off 204, 134 128, 386 59. 0% Total 235, 572 158, 873 48. 3% -67. 3% 28

Analysis of Changes Other material losses written-off p Decrease in expenditure on settlements due to substantive claims in previous year not repeated. p Increase in expenditure on legal fees due to additional legal assistance utilised by the DOD. p Write-off of unauthorised expenditure which occurred in previous financial years (Rm 204, 134). 29

Debtors Receivables Older than 2011/12 2010/11 three Total years R'000 Less than one year R'000 One to three years R'000 Claims recoverable 12. 1 & Annex 4 53 897 2 102 Staff debt 12. 2 61 895 8 295 12 280 82 471 67 152 Other debtors 12. 3 63 837 23 012 171 991 258 840 456 627 Total 2 240 58 238 7 031 179 629 33 409 186 511 399 549 530 810 30

Analysis of Changes p Increase in claims recoverable is mainly due to debtor arose from the Provincial Government of KZN. p Increase in staff debt mainly due to losses of state money and studies at state expense. p Decrease in other debtors is mainly due to unauthorised expenditure written off included in debtors (Rm 204 134). 31

Irregular Expenditure 27. Irregular expenditure 27. 1 Reconciliation of irregular expenditure Opening balance Add: Irregular expenditure - relating to prior year Add: Irregular expenditure - relating to current year Less: Amounts condoned Less: Amounts recoverable (not condoned) Less: Amounts not recoverable (not condoned) Irregular expenditure awaiting condonement 2011/12 R'000 2010/11 R'000 876 029 1 765 277 64 313 139 350 364 688 575 ( 571 890) (1 522) ( 10) ( 55 440) - - 718 806 876 029 Analysis of awaiting condonement per age classification Current year Prior years 340 518 378 288 584 114 291 915 Total 718 806 876 029 32

Irregular Expenditure cont… 27. 2 Details of Irregular expenditure - Current Year Disciplinary steps taken/criminal Incident proceedings Procurement without Financial Authority Under investigation to determine and Government Order responsible official. Contract irregularities Under investigation to determine responsible official. Other matters The member was released from his cashier duties while under going corrective training. Exceeding delegated powers Under investigation to determine responsible official. Deviation from the Bidding process. Submission for condonement in process to NT. No declaration of interest by prospective Under investigation to determine suppliers responsible officials. Sub-division of requirements Under investigation to determine responsible officials. No declaration of interest by SCM officials Under investigation to determine responsible officials. Sourcing of aircraft No disciplinary action required. Submission submitted to NT. Total 12 411 4 106 3 39 271 262 9, 391 1, 056 61 52, 036 350 364 33

Irregular Expenditure cont… 27. 3 Details of irregular expenditure condoned Incident Procurement without Financial Authority and Government Order A 400 M Airbus. Day to day operational costs. Other matters Performance incentives Contract irregularities Exceeding delegated power Deviation from Bidding process Deviation from Payment Process Sub division of requirements Condoned by (condoning authority) Central Commercial Procurement Sub-Committee and CFO. Prosecution and Recovery committee and CFO. Accounting Officer. Prosecution and Recovery committee and CFO. Prosecution and Recovery committee, CFO and AO. Prosecution and Recovery committee. 126 848 38 027 821 112 003 8 001 6 335 190 443 88 736 676 571 890 34

Assets 33. Movable Tangible Capital Assets MOVEMENT IN MOVABLE TANGIBLE CAPITAL ASSETS PER ASSET REGISTER FOR THE YEAR ENDED 31 MARCH 2012 Opening balance Current year adjustments Additions to prior year balances Disposals Closing balance R'000 MACHINERY AND EQUIPMENT Transport assets 7 759 132 SPECIALISED MILITARY ASSETS (6 398 096) 391 629 45 468 852 (26 039 438) 1 752 618 - 18 070 419 2 041 37 709 720 (19 641 342) 47 2 041 37 709 720 (19 641 342) Specialised military assets TOTAL MOVABLE TANGIBLE CAPITAL ASSETS R'000 - 18 070 419 393 670 47 19 823 037 35

Analysis of adjustments to prior year closing balances - Assets acquired prior to 1 April 2002 disclosed at various values instead of R 1. - Inventory incorrectly classified as capital assets. - Removal of duplicated assets. - Incorrect classifications. - Removal of assets disposed of. - Elimination of values relating to assets disclosed at weighted average prices. 36

Assets cont… 34. Immovable Tangible Capital Assets MOVEMENT IN IMMOVABLE TANGIBLE CAPITAL ASSETS PER ASSET REGISTER FOR THE YEAR ENDED 31 MARCH 2012 Opening balance R'000 BUILDINGS AND OTHER FIXED STRUCTURES Dwellings Non-residential buildings Other fixed structures Curr year adjustments to prior year balances R'000 Closing Additions Disposals balance R'000 15, 421, 191 - - 15 421 191 - - - - 15, 421, 191 - - 15, 421, 191 - - - Heritage assets - TOTAL IMMOVABLE TANGIBLE CAPITAL ASSETS - 29 210 811 HERITAGE ASSETS - - - - - 29 210 811 37

Auditor General’s Report 38

Audit Outcome p. Unqualified Report 39

Summary of the findings • • • Unqualified report Emphasis of Matters Ø Financial Reporting Framework - Departure Ø Restatement of Corresponding Figures for Movable Tangible Capital Assets Other Matters Ø Achievement of planned targets Ø Material Adjustments to Annual Performance report Ø Strategic planning and performance management Ø Human Resource Management and Compensation Ø Internal Audit Ø Annual Financial Statements, Performance and Annual report Ø Procurement and Contract Management 40

DOD AUDIT REPORT AND ACTION PLANS For the year ended 31 March 2012 41

Audit Outcome - Matters of Emphasis p Emphasis of matters paragraphs are included in the auditor’s report in order to highlight them for the benefit of the users of the financial statements. p There are 2 matters of emphasis in the report: 42

Audit Outcome - Matters of Emphasis continuation n Financial Reporting Framework As disclosed in note 33 to the financial statements, the National Treasury has granted the department a departure from the Departmental Financial Reporting Framework. In terms of this departure, the department only has to disclose information for the categories of specialised military, transport and immovable assets and not the other categories of assets as required by National Treasury in the Departmental Financial Reporting Framework as set out in the accounting policy note. n Restatement of corresponding figures The corresponding figures for movable tangible capital assets were adjusted in disclosure note 33 as current year adjustments to prior year balances. 43

AG findings Emphasis of Matter Items GDA Financial reporting framework 10/11 11/12 Main Finding - Eo. M As disclosed in note 33 to the financial statements, the National Treasury has granted the department a departure from the Departmental Financial Reporting Framework. Reasons for the departure: • The DOD is operating multiple non-integrated Logistical systems resulting in the DOD’s AFS being qualified on assets in 2010/11 financial year. • To correct this the DOD focused on correcting Specialised Military, Transport and Immovable assets during FY 2011/12. 44

AG findings and corrective action Emphasis of Matter Items GDA 10/11 11/12 Main Finding Restatement of corresponding figures Eo. M The corresponding figures for movable tangible capital assets were adjusted in disclosure note 33, current year adjustments to prior year balances. Reasons for the corrections made: • In the previous year the DOD could not provide sufficient appropriate audit evidence to support the amount disclosed, and the records did not permit the application of alternative audit procedures. • In the year under review the additions, disposals, and closing balances for these categories of assets were supported by the asset register and adequate records, necessitating adjustments to the opening balances. 45

Other Matter Items GDA 10/11 11/12 Main Finding Achievement of planned targets - OM Of the total number of planned targets, only 119 were achieved during the year under review. This represents 43% of total planned targets that were not achieved during the year under review. Measures and Completion Dates • This is mainly due to the fact that indicators and targets were not suitably developed during the strategic planning process. • Appropriate processes of developing targets has been developed to rectify this situation as follows: 46

Other Matter Items GDA 10/11 11/12 Main Finding Achievement of planned targets cont… - OM Of the total number of planned targets, only 119 were achieved during the year under review. This represents 43% of total planned targets that were not achieved during the year under review. • The department has adopted the SMART criteria for developing indicators and targets in its Strategic Planning Framework. • The department has also instituted a Performance Information Management Steering Committee to approve all performance indicators in terms of the SMART criteria. • All future indicators will have a technical indicator description / datasheet which will give the description, purpose, calculation, responsibility etc. of the indicator to ensure better developed indicators and targets during the planning process phase. 47

Other Matter Items GDA Leadership 10/11 11/12 Main Finding - OM The department did not have sufficient monitoring controls for the overall process of reporting, and regular reviewing of information to ensure the accuracy and completeness of financial and performance information. Management did not always have approved updated policies and procedures, to guide management at the lowest level to ensure compliance with National Treasury disclosure requirements, and the Framework for Managing Programme Performance Information. ” 48

Other Matter Items – Leadership cont… Control Measures put in place • The department’s effort in developing an Interim Department of Defence Instruction POL&PLAN/00001/2011 (Edition 1) DS/CDPSP/R/501/8/P dd 10 April 2012 was approved and promulgated by the Sec Def and C SANDF on the 10 April 2012 thereby ensuring the directing, management and reporting of departmental performance information and the associated activities related thereto for FY 2012/13. • A final approved and promulgated corporate policy will be finalised within the interim period of 12 months, thus before the end of the FY 2012/1 and communicated to all staff to ensure that they know and understand what is expected from them. 49

Other Matter Items GDA 10/11 11/12 Main Finding Financial and performance management - OM Existing manual and automated controls were not designed to ensure adequate record keeping to support accurate and complete financial and performance reporting which is accessible and available as required by National Treasury”. 50

Other Matter Items – Financial Performance and management cont… Control Measures put in place • Various initiatives regarding Information Technology (IT) systems have been embark on the address the management of performance information within Defence. However, these performance information systems/enablers have proved inadequate to fully address the strategic management requirement of Defence especially due to the ever-increasing planning, budgeting and reporting requirements over the past few years by National Treasury and more recently by the newly established Department for Performance Monitoring and Evaluation (DPME) in the Presidency. • To ensure that the IT systems that support the management of performance information within the Department do not evolve in a fragmented manner, an Integrated Strategic Management Enabler (ISME) is being proposed and requested from CMIS / SITA. 51

AG findings and corrective action Other Matter Items GDA Material adjustments to the annual performance report 10/11 11/12 Main Finding - OM Material audit adjustments in the annual performance report were identified during the audit, all of which were corrected by management. Root Causes • DOD systems were not designed for an accrual accounting basis and some are still manual and therefore prone to risks of human error. • While training on accruals was done across the various units staff transfers and changes of personnel took place. • Major revaluation of asset values as a result of the policy changes emanating from Treasury approval for departure. 52

AG findings and corrective action Other Matter Items GDA Material adjustments to the annual performance report 10/11 11/12 Main Finding - OM Material audit adjustments in the annual performance report were identified during the audit, all of which were corrected by management. Measures and Completion dates • Development of enhancements to ensure that GRV’s are recorded and required as part of the payment process. • Road shows are planned again and further training will be provided. • Continuous evaluation of progress will be assessed as part of the quarterly interim financial reporting. 53

AG findings and corrective action Other Matter Items GDA 10/11 11/12 Main Finding Strategic planning and performance management - OM The accounting officer did not provide Parliament with the strategic plan and annual performance plan relating to the SANDF programmes at least 10 days prior to the discussion of the department’s budget vote as required by Treasury Regulation (TR) 5. 2. 2. Corrective Actions • The plan was subsequently tabled in Parliament on 30 March 2012. • CSANDF appointed a delegate who will in future attend to the tabling of the plans personally. 54

Other Matter Items GDA 10/11 11/12 Main Findings Human resource management and compensation OM OM Some senior managers did not enter into a performance agreement for the current year as per the requirements of PSR 4/III/B. 1 and Department of Defence Instruction: POL and PLAN No. 00065/2002 (Edition 2) dated 1 January 2005. Measures and Completion Dates • Issue requests for submission of performance agreements at the beginning of each calendar year to ensure that all affected members are aware of the submission target date of 31 May 2012. • Issue notifications timely via the intranet. • Issue notifications for the submission of the outstanding performance agreements to the Chiefs of Services and Divisions. • Inform Secretary of Defence and Chief SANDF about noncompliance by senior managers. 55

AG findings and corrective action Other Matter Items GDA 10/11 11/12 Main Findings Human resource management and compensation OM OM Some employees received overtime compensation in excess of 30% of their monthly salaries, in contravention of PSR 1/V/D. 2(d) and Department of Defence Instruction: POL and PLAN No. 00018/2004 (Edition 1) dated 1 November 2005. 56

Human resource management and compensation (continued) Measures and Completion Dates • In order to ensure compliance, the DOD has implemented the following measures: • A DOD Instruction was promulgated to inform Services and Divisions about the approval process for overtime exceeding 30% basic salary. • Furthermore, CHR will revisit the policy and reduce the delegation of approval from Minister to the relevant Authority without compromising compliance. • The PERSOL system was enhanced to block the capturing of transactions exceeding 30% of monthly salary with effect from 01 May 2012. • SAMHS also promulgated an instruction to regulate the capturing of overtime above 30% of monthly salary. • A submission to obtain authority from the Minister of Defence and Military Veterans for the overtime worked is in process. 57

AG findings and corrective action Other Matter Items GDA 10/11 11/12 Main Findings Annual financial statements, performance and annual report OM OM The financial statements submitted for auditing were not prepared in all material respects in accordance with the requirements of section 40(1)(a) of the PFMA. Corrective Actions • This finding relates to material misstatements on capital assets identified by the auditors which were subsequently corrected, resulting in the financial statements receiving an unqualified audit opinion. • Policies and processes need to be updated and this will be done in the short and medium term by means of own (restricted) capabilities and external staff support by means of contracting. LEGEND - OM: Other Matter EOM: Emphasis of Matter Q: Qualification 60

AG findings and corrective action Other Matter Items GDA 10/11 11/12 Main Findings Procurement and contract management OM OM • In some instances goods and services of a transaction value above R 500 000 were procured without inviting competitive bids as required by TR 16 A 6. 1 and TR 16 A 6. 4. 61

AG findings and corrective action Other Matter Items – Procurement and contract management Corrective Measures (SCM Findings) • Policy and Prescripts. A comprehensive review of the Supply Chain Management Policy Regime is currently in process. The review will include DODI on procurement, all relevant procurement regulations and procurement delegations. • Vetting of SLA’s, contracts, etc. To be done by legal services prior to signing of procurement contracts. • Publishing bidders details on website for all req >R 500 k. Done within 10 days after closure of the bid. • Verifying ID numbers of bidders against departments post establishment table. Must use the revised SBD 4 “Declaration of Interest” document and this must be done for price quotations and bids. • Procurement Road-show. To be conducted to interface with procurement officials. 62

Other Matter Items GDA Procurement and contract management 10/11 11/12 Main Findings OM OM In some instances employees of the department performed or engaged themselves to perform remunerative work outside their employment in the department without written permission from the relevant authority as per the requirements of section 30(b) of the Public Service Act and section 52. 5 (a) of the Defence Act 42 of 2002. Measures and Completion Dates • C HR requested Services and Divisions to instruct their level 3 and 4 officers commanding to ensure that appropriate audit evidence are kept on file where approval was granted to their employees to perform remunerative work outside their employment. • The policy on remunerative work is under review for completion and implementation. • Investigations are in process on the reported cases. 63

SPECIAL DEFENCE ACCOUNT 64

SPECIAL DEFENCE ACCOUNT Sequence of Events p Financial Statements for the Special Defence Account (SDA) have always been prepared on an Entity Specific accounting framework as approved by the National Treasury (NT) prior to the financial year 2010/2011. p Change in South African Auditing Practice Statements 2 (SAAPS 2) in October 2010 excluded Entity Specific accounting framework as an approved accounting framework for the Public Sector. p NT letter dated 18 May 2011 instructed the DOD that as a deemed unlisted Public Entity, prepare financial statements in terms of GRAP but left which option DOD could utilise in terms of the GRAP framework. 65

SPECIAL DEFENCE ACCOUNT Sequence of Events p Financial statements for the SDA are now prepared in accordance with GRAP (ASB). p The application of GRAP 104 (accounting for financial instruments) instead of GRAP 6 (consolidated financial statements) was approved by the Minister of Finance on 03 May 2012 as an exemption for the SDA – approval granted until 31 March 2013. p Financial Statements of the SDA for the year ended 31 March 2011 are now included in Annual Report for 2011/12. 66

SPECIAL DEFENCE ACCOUNT SDA 2011 67

Statement of Financial Performance 2010/11 2009/10 R'000 Note REVENUE 3 182 452 11 717 268 Revenue from non-exchange transactions 3 3 094 766 8 685 260 Revenue from exchange transactions 4 87 686 2 962 030 Foreign Exchange gain 16 - 69 978 4 948 835 5 357 175 EXPENDITURE Operating expenditure 5 4 857 199 5 357 175 Foreign Exchanges losses 16 91 636 - (1 766 383) 6 360 093 68

Analysis of major changes Statement of Financial Performance • The decrease in the Revenue from non-exchange transactions is due to the Strategic Defence Procurement Packages (SDP’s) nearing completion. • The decrease in the Revenue from Exchange transaction is due to the fact that in the previous financial year, there was the first time recognition of the debtor from the A 400 contract cancellation. 69

Statement of financial Position 2010/11 R'000 2009/10 R'000 ASSETS Note Current assets Cash and cash equivalents Receivables from exchange transactions Receivables from non-exchange transactions Non-current assets Receivables from Non-exchange transactions Other financial assets TOTAL ASSETS 8 9 9 276 681 5 455 437 3 812 737 8 507 36 776 6 7 8 7 357 647 3 594 217 3 714 283 49 147 48 642 36 776 14 602 34 040 7 394 423 9 325 323 70

Statement of Financial Position 2010/11 R'000 2009/10 R'000 LIABILITIES Note Current liabilities Payables from exchange transactions Payables from non-exchange transactions Funds to be surrendered to NRF Other financial liabilities Non-current liabilities Payables from exchange transactions TOTAL LIABILITIES 10 11 12 13 10 269 285 156 741 35 020 53 986 23 538 - 376 896 170 185 34 690 149 858 22 163 2 920 269 285 379 816 TOTAL NET ASSETS 7 125 138 8 945 507 NET ASSETS Reserves Accumulated Surplus Net Assets 7 125 138 8 945 507 71 8 945 507

Analysis of major changes Statement of Financial Position p Change in cash and cash equivalents was due to a decrease in the revenue from non-exchange transactions. p The decrease in the non-exchange transactions is a result of the Strategic Defence Procurement Packages(SDP’s) nearing completion. 72

Statement of Changes in Net Assets 2010/11 2009/10 R'000 Note Balance at the beginning of the year As previously stated Change in Accounting Policy 8 945 507 (Deficit)/Surplus for the year As previously stated Change in accounting policy Prior period error 2 116 486 618 786 (149 858) (1 766 383) Distribution to the NRF 8 118 161 827 346 (53 986) 3 24 2 735 272 6 360 093 24 23 6 055 587 358 418 (53 912) 7 125 138 8 945 507 73

Analysis of major changes Statement of Changes in Net Assets p The decrease in the Net Assets is due to the net loss incurred in this reporting period. p The loss was financed from the SDA Reserves. 74

75

Analysis of changes Cash Flow Statement • The decrease in cash and cash equivalents was mainly due to the decrease in the revenue from non-exchange transactions (decrease in SDP’s activity). 76

Auditor General’s Report 2010/11 77

Summary of the findings • • Emphasis of Matter items on Ø Significant uncertainties Ø Fruitless and wasteful expenditure Other Matter items on Ø Annual financial statements and annual reporting Ø Procurement process and contract management 79

Audit Outcome - Matters of Emphasis p Emphasis of matters paragraphs are included in the auditor’s report in order to highlight them for the benefit of the users of the financial statements. p There are 2 matters of emphasis in the report: 80

Audit Outcome - Matters of Emphasis continuation n Significant uncertainties As disclosed in note 20 to the financial statements, the SDA through the Department of Defence and its service provider is a defendant in certain lawsuits. The outcome of these lawsuits cannot be determined at present and no provision has been made for any liabilities that may result. Fruitless and Wasteful Expenditure As disclosed in note 22 to the financial statements, fruitless and wasteful expenditure of R 110 414 000 was incurred after the reinstatement of a contract that had previously been cancelled. n 81

SDA AUDIT REPORT AND ACTION PLANS For the year ended 31 March 2011 82

AG findings Emphasis of Matter Items SDA Significant uncertainties 09/10 10/11 Main Finding - Eo. M As disclosed in note 20 to the financial statements, the SDA through the Department of Defence and its service provider is a defendant in certain lawsuits. The outcome of these lawsuits cannot be determined at present and no provision has been made for any liabilities that may result. Progress made in clearing/resolving the matter: • The matter was considered in Lisbon and the Court found in favour of Armscor. • The Lisbon Court ruled that it has no jurisdiction to hear the matter. The plaintiffs have filed an appeal. • Armscor filed a counter argument during February 2012 requesting the dismissal of the appeal. The date for the hearing of the appeal has not yet been set down. 83

AG findings Emphasis of Matter Items SDA Fruitless and Wasteful Expenditure 09/10 10/11 Main Finding - Eo. M As disclosed in note 22 to the financial statements, fruitless and wasteful expenditure of R 110 414 000 was incurred after the reinstatement of a contract that had previously been cancelled. Progress made in clearing/resolving the matter: The matter referred to in this case was discussed at the relevant parliamentary committee dealing with Intelligence matters and is receiving attention. 84

Other Matter Items GDA Annual financial statements and annual reporting 09/10 10/11 Main Finding - OM Due to delays in finalising the accounting framework to be adopted for the 2010 -11 financial year and the late preparation thereof in terms of SA Standards of GRAP, the accounting officer could not submit the financial statements for auditing within two months after the end of the financial year, as required by section 40(1)(c) of the PFMA. Furthermore, as a result of the delays, the accounting officer could not comply with the requirements of section 40(1)(d) of the PFMA to submit the financial statements and audit report of 2010 -11 to the executive authority within five months after the end of the financial year. Corrective Actions • • • This was as a result of a change in the basis of accounting from Entity Specific to Generally Recognised Accounting Practices for Public Entities. As a result of that requirement the financial statements had to be reproduced and the numbers restated for the two financial years ended 31 March 2010 and 2011 respectively. These financial statements have, in order to enhance the proper presentation and relevance of the financial state of affairs of the SDA, been included in the Annual Report of the Vote 22 and are now presented as part of the Vote. 85

Other Matter Items GDA Procurement process and contract management 09/10 10/11 Main Finding - OM The correct procedures were not followed when signing the contract for a major capital project, as this contract was not recommended by the constituted adjudication committees as prescribed by the supply chain management policy. This non-compliance also resulted in possible financial misconduct as per section 81(1) of the PFMA. This financial misconduct was not reported to the National Treasury as per section 85 of the PFMA. Corrective Actions A board of inquiry will be instituted to conduct a full investigation and provide a report which will guide the processes to resolve this matter. 86

SPECIAL DEFENCE ACCOUNT SDA 2011/12 87

Prior year (2011) restatements p p During the 2011/2012 audit process, certain prior year figures were restated: n Prepayments & Advances n Cash & Cash Equivalents n Other Financial Assets These changes were not material and did not affect the unqualified audit opinion 88

89

Analysis of major changes Statement of Financial Performance • Change in Foreign exchange gains is mainly due the forex profit of the A 400 M aircraft. • Forex profit is due to the strengthening of the rand value. 90

91

Analysis of major changes Statement of Financial Position • Change in Net Assets is mainly due to the collection of a debtor in respect of the A 400 M aircraft; and • Repayment of the collected amount to the National Treasury – Rb 3. 487 92

93

Analysis of major changes Statement of Changes in Net Assets • Repayment of the cash collected to the National Treasury – Rb 3. 487 94

Analysis of changes Cash Flow Statement • The cash position remained relatively constant with expenditure in line with the vote allocation. • The large increase in cash receipts is due to the collection of the debtor in respect of the A 400 M aircraft, but • The amount was repaid to the National Treasury, thus increasing and decreasing the cash resources. 96

OTHER MATTERS • Contingent liabilities: Court case in Portugal was won by DOD. An appeal has been lodged. Final outcome expected end of 2013. • Irregular expenditure: Local component of the A 400 M aircraft contract to be condoned in 2012/2013. • Fruitless and Wasteful expenditure: Contract cancelled and re-instituted. 97

Auditor General’s Report 2011/12 98

Audit Outcome p. Unqualified report 99

Summary of the findings • Emphasis of Matter items on Ø Significant uncertainties Ø Financial reporting framework Ø Restatement of corresponding figures • Other Matter items on Ø Financial misconduct 100

SDA AUDIT REPORT AND ACTION PLANS For the year ended 31 March 2012 101

Audit Outcome - Matters of Emphasis p Emphasis of matters paragraphs are included in the auditor’s report in order to highlight them for the benefit of the users of the financial statements. p There are 3 matters of emphasis in the report: 102

Audit Outcome - Matters of Emphasis continuation n Significant uncertainties As disclosed in note 17 to the financial statements, the SDA through the Department of Defence and its service provider is a defendant in certain lawsuits. The outcome of these lawsuits cannot be determined at present and no provision has been made for any liability that may result. The aforementioned is in accordance with the requirements of the accounting standards. 103

Audit Outcome - Matters of Emphasis continuation n Financial reporting framework As disclosed in note 1. 6. 1 to the financial statements, the Minister of Finance has exempted the SDA per General Notice 563 of 2012 issued in Government Notice No 35533 of 23 July 2012 from applying GRAP 6 (consolidated statements) and instead applies GRAP 104 (accounting for financial instruments) regarding special defence activities. 104

Audit Outcome - Matters of Emphasis continuation n Restatement of corresponding figures As disclosed in notes 5 and 7 to the financial statements, the corresponding figures for 31 March 2011 have been restated as a result of an error discovered during 31 March 2012 in the financial statements of the SDA. 105

AG findings Emphasis of Matter Items SDA Significant uncertainties 10/11 11/12 Main Finding Eo. M As disclosed in note 17 to the financial statements, the SDA through the Department of Defence and its service provider is a defendant in certain lawsuits. The outcome of these lawsuits cannot be determined at present and no provision has been made for any liability that may result. The aforementioned is in accordance with the requirements of the accounting standards. Progress made in clearing/resolving the matter: • The matter was considered in Lisbon and the Court found in favour of Armscor. • The Lisbon Court ruled that it has no jurisdiction to hear the matter. The plaintiffs have filed an appeal. • Armscor filed a counter argument during February 2012 requesting the dismissal of the appeal. The date for the hearing of the appeal has not 106 yet been set down.

AG findings Emphasis of Matter Items SDA Financial reporting framework 10/11 11/12 - Eo. M Main Finding As disclosed in note 1. 6. 1 to the financial statements, the Minister of Finance has exempted the SDA per General Notice 563 of 2012 issued in Government Notice No 35533 of 23 July 2012 from applying GRAP 6 and instead applies GRAP 104 regarding special defence activities. Progress made in clearing/resolving the matter: • Discussions with National Treasury are underway in trying to resolve/finalise this matter. 107

AG findings Emphasis of Matter Items SDA 10/11 11/12 Main Finding Restatement of corresponding figures - Eo. M As disclosed in notes 5 and 7 to the financial statements, the corresponding figures for 31 March 2011 have been restated as a result of an error discovered during 31 March 2012 in the financial statements of the SDA. Reasons for the corrections made: • In the previous year errors occurred in Prepayments, Cash and cash equivalent and forex calculations. 108

SANDF Fund – Financial Position p p p Auditor General’s report n Unqualified opinion. n Utilise Defence’s Audit Committee Total Asset base is largely held in liquid assets as follows: n Cash and Cash equivalents R 28 447 n Investments (Fixed Deposits R 12 635 823 n Total Assets R 12 664 270 Low liquidity risk and low to medium interest risk as investments are made in reputable financial institutions. 113

Analysis of major changes Statement of Financial Position • Change in Other financial assets are due to: – Interest earned on investments – Non-payment of aid to beneficiaries • Structures and processes are now in place to enable the Fund to start with aid in 2013. • Aid was offered during 2012, but not accepted by the beneficiary (personal choice). 114

SANDF Fund – Financial Performance p Surplus for the year has declined from R 655 k(2010/11) to R 616 k (2011/12) as a result of decline in revenue and increase in expenditure. p Expenditure has increased from R 39 k(2010/11) to R 44 k (2010/11). n The increase is due to escalation in audit fees (R 29 384) p Operating Revenue of the fund is derived from Investment income which: n Is sensitive to interest rate changes n Has declined in the year under review from R 694 k to R 660 k (5% decline). 115

Thank You 116