DEPARTMENTOFDEFENCEANDNATIONALTREASURYBUDGETTASKTEAM

09 NOVEMBER 2018

BRIEFINGONDODFUNDINGMODELFORTHEDR2015

RESTRICTED

•  Context

•  IntroductionandFocusofEffort.

•  CriticalAssumptions.

•  SequenceofWork.

•  PlantoArresttheDeclineandLogicModel.

•  BalancedEvolutionandFundingRequirementoftheSANDF.

•  CostedOption2.

•  DefenceFundingModel.

•  EstimatedRevenueGenerated,FindingsandProposals.

•  RequirementsfromtheFiscus.

•  RisksandImplications.

•  Conclusion.

•  WayForward.

2

SCOPE

RESTRICTED

INTRODUCTION

•  AspartoftheimplementationoftheDefenceReview2015(DR2015)andinresponsetoaMinisterialDirective,aprocesstodevelopa‘fundingmodel’fortheDODwasstarted.

•  The‘fundingmodel’exercisewasintendedtoexplorenon-traditionalrevenuestreamstosupplementtheDefencefundingallocationfromNationalTreasurysoastoenabletheimplementationoftheDR2015.

•  TheinvestigationwascompletedinAugust2017withtherecommendationsthatwillbediscussedinthispresentation.

•  Inaddition,onthe23rdOctober2016,anInterdepartmentalDOD/NationalTreasuryBudgetTaskTeam(BTT)wasestablishedontheinstructionoftheDG’sofbothNTandtheDODtoexplorefundingtrajectoryoptionsto‘ArresttheDecline’intheDOD.

3RESTRICTED

MS2–Reb

alan

ceth

eDefen

ceForce

MS5–Lim

ited

WarCap

ability

“ReducedDefenceForce”

ReducedCoreGrowthCapability

CoreGrowthCapability

PartialReach&InterveneCapability

SignificantReach&InterveneCapability

LimitedWarCapability

RedesigntoAllocation

ExpandIndependently

ExpandinPartnership

MS1–Arrestthe

Declin

e

MS3–Cap

acitatingtheDefen

ceForce

MS4–Respo

ndingtoCha

llenges

2015 2020 2025 2030 2035

2015DefenceReview“Reachand

Intervene”

Thewiderangeofthestatusofthecurrent

capabilities.

1998DefenceReview“CoreGrowthForce”

CONTEXT:DR2015:ChangedLevelofDefenceAmbition

4RESTRICTED

1.   RE-DESIGNTOALLOCATION(RED)•  Vastlyreduceddefencecapability.

•  Doesnotfullysupportacontinentalleadershiprole(littlegravitas).

•  Unabletofullycomplywiththeconstitutionalrequirements.

•  Reducedorderedcommitments.

2.   EXPANDINDEPENDANTLY(GREEN)•  Retainsovereignindependence.

•  Defencecapabilitycommensuratewithcontinentalexpectations.

•  Significantabilitytoreachandinterveneovertime.

•  Continentalgravitasandvitalinterestsaresecured.

3.   EXPANDINPARTNERSHIP(BLUE)•  Relianceonmultiplestrategicpartners.

•  Increasesfundingoptionsfortrajectory.

•  Mayaccelerateimplementation-exceptHR.

•  Reachandintervenecapabilityachievedwithinshortertime.

CABINETSELECTEDOPTION2

CONTEXT:BroadDR2015StrategicPolicyOptions

5RESTRICTED

•  TheDefenceReview2015isSouthAfrica’snewDefencePolicyandassuch,thewaysandmeanstofunditovertimewouldbelookedat.

•  TheDepartmentofDefence(DOD)developedthe‘DODPlantoArresttheDecline’togiveeffecttoMS1oftheDR2015“ArrestingtheDecline”.

•  TheMinisterofDefenceapproved‘CostedOption2’ofthe‘DODPlantoArresttheDecline’.CostedOption1andOption3oftheplanwereconsideredtobeunviableduetoimpracticaltimeconsiderations.

•  TheapprovedplanwasscrutinisedbytheBTTtodeterminefundingsolutionsforimplementation.

•  ThefocusofthedeliberationsweretodeterminewhatcouldbefeasibleandexecutableoverthenexttwoMTEFplanningcycleperiods.

6

FOCUSOFEFFORT

RESTRICTED

7

CRITICALASSUMPTIONS

•  TheassumptionsforCostedOption2areasfollows:

–  Year1fortheimplementationofDR2015is2018/19

–  Inflationhasnotbeenincludedandtherequirementhasbeendeterminedinrealtermson2016/17prices.

–  ThefiguresreflecttheoperationalburdenoftheSANDFexpandedoveraperiodofsixyears.

–  Itfollowsanapproachofsignificantramp-upofthebudgetallocationtoallowforcapacitybuildingandindustryresponse.

–  Theallocationoffundsshouldbewithintheprioritisationlogicthathasbeenfollowedandreferredtoasa‘balancedevolution’processthatwillbeexplainedduringthispresentation.

RESTRICTED

•  Thefollowingaspectswereunpackedanddiscussedindetail:

–  The‘DODPlantoArresttheDecline’togetherwithitsfullfundingrequirement.

–  Identificationofcriticalprioritiesforfundinginterventions.

–  Identificationofareasinwhichefficiencyandcostsavingscouldberealized.

–  Abetterunderstandingofthereducedfundingpotentialderivedfromtheopportunitiesidentifiedinthedevelopmentofthe‘FundingModel’.

•  Thefollowingelementswerediscussedinbroad:

–  TheCOEissuesandtheHRfootprintbasedonthecabinetdecisiontoreducegovernmentemployeesandanunderstandingofthedilemmasthattheDODhasinthisdomain.

–  AhighleveloverviewoftheSDAandhowitismanagedincludingthereasonsforroll-oversofpartsofthefundstherein.ThedetailcontainedintheSCAMPwasnotmadevisibleinthediscussions.

8

BTTSEQUENCEOFWORK

RESTRICTED

9

DODPLANTOARRESTTHEDECLINE

RESTRICTED

10

LOGICMODELFORTHEPLANTOARRESTTHEDECLINE(MS1)

RESTRICTED

11

MeasuresfortheBalancedEvolutionoftheSANDF

RESTRICTED

BalancedEvolution FY18/19 FY19/20 FY20/21 FY21/22 FY22/23 FY23/24 GrandTotal

ConductMilitaryOperations R0 -R663620587 -R300514416 -R133755808 -R1085354221 -R2183245032BorderSafeguarding -R200633712 -R133755808 -R351443372 -R685832892CooperationwiththeSAPS R0 R0 R0InterventionOperations -R663620587 -R99880704 -R763501291PeaceMissions -R503474849 -R503474849SupporttoOGD&Agencies -R230436000 -R230436000EfficiencyMeasures -R23000000 -R107104238 -R1279099098 -R665310285 -R3681575882 -R5756089504CommandandStaffSystem&CombatFormations R0 -R1267782462 -R1267782462DecentralisedProcurement R0 -R7230443 -R7230443DODCostingandBudgetingTool R0 R0FundingModel R0 R0 R0HRRejuvenationPlan -R22000000 -R107104238 -R242609138 -R665310285 -R2235846994 -R3272870655IntegratedDEISMasterPlan R0 -R1036489960 R0 -R159715983 -R1196205943Policy&CommIntervention -R1000000 R0 R0 -R11000000 -R12000000SecretariatStrategy R0 R0 R0SustainmentMeasures -R2059774605 -R7825986838 -R2484355877 R0 -R4663618543 -R17033735864ActivationofProductionLinesforAmmunitionandSpares R0 R0MaintenanceofHealthCapability -R222449000 -R503000000 -R725449000MaintenanceofPMEforJFE -R313799991 -R732199979 -R1045999970ProcurementofAmmunitionforJFE -R2920060104 -R1667946031 -R2336903961 -R6924910096ProcurementofMedicalStockforJFEandSANDFFootprint -R39049000 -R274400000 -R313449000ProcurementofRationsandFuelforContingencyOperations -R87856617 -R87856617ProcurementofSparesforPMEforJFE -R63900000 -R149100000 -R58021582 -R271021582RejuvenateNavalDockYard -R3600000 -R8400000 -R12000000RejuvenationoftheSAArmyMaintenanceCapability -R674160000 -R1573040000 R0 R0 -R2247200000SAAFMaintenanceContracts -R654959997 -R1528239993 -R2183199990UpgradeCriticalFacilitiesforForcePreparation&Support -R137546762 -R816409846 -R2268693000 -R3222649608CapabilityDevelopmentMeasures R0 -R4091531461 -R353288707 -R235525805 -R3298445154 -R7978791127AirInterceptionCapability -R150999990 -R150999990AirMobilityCapability R0 -R1022249980 -R940000000 -R1962249980CombatHelicopterCapability -R282000000 -R282000000DomainAwarenessCapability -R1081509980 -R1467530868 -R2549040848InterventionCapability R0 -R297811429 -R98714286 -R396525715Light&MotorisedInfantryCapability -R169140000 -R112760000 -R500000 -R282400000MaritimePatrolCapability -R49000000 -R526200000 -R575200000MHStoOperationsandSANDFFootprint R0 -R265500000 -R265500000RapidReactionCapability -R77000000 -R184148707 -R122765805 -R383914512SpecialForcesCapability -R1080960082 -R1080960082UnderwaterSecurityCapability -R50000000 -R50000000CapabilityRenewal -R52000000 -R912648874 -R6358114828 -R10950431022 -R2083240453 -R20356435177AirDefenceCommandandControlCapability -R6499980 -R6499980DefenceIntelligence:Counter-IntelligenceCapability -R411000000 -R411000000EnhanceMilitaryPoliceCapability -R52000000 -R838800200 -R890800200LandwardAirDefenceArtilleryCapability -R70562153 -R246967534 -R35281076 -R352810763LandwardConventionalCapability -R63766730 -R63766730LandwardDefenceCommandandControlCapability -R9494234 -R9494234LandwardStrategicDirectionCapability -R7980641 -R23941922 -R111728967 -R15961281 -R159612810Landward:ArmourCapability -R106949410 -R374322936 -R53474705 -R534747052Landward:ArtilleryCapability -R88907634 -R311176720 -R44453817 -R444538171Landward:EngineerCapability -R25167871 -R75503613 -R352350193 -R50335742 -R503357418Landward:InfantryCapability -R179475036 -R538425109 -R2512650510 -R358950073 -R3589500728Landward:IntelligenceCapability -R22872542 -R80053896 -R11436271 -R114362708Landward:PMETLCM&Procurement -R3427273665 -R2284849110 -R5712122775Landward:ProductSystemManagementCapability -R170550804 -R511652412 -R2387711257 -R341101608 -R3411016081Landward:SignalCapability -R42707792 -R128123376 -R597909090 -R85415584 -R854155843Landward:SupportCapability -R1354408758 -R1690710810 -R241530116 -R3286649684MaritimePatrolCapability -R12000000 -R12000000

GrandTotal -R2134774605 -R7825986838 -R8259261037 -R8291017049 -R11985022919 -R14812234254 -R53308296703

CumulativeIncreaseinBaselineAllocations -R2134774605 -R9960761443 -R18220022480 -R26511039530 -R38496062449 -R53308296703 12

13

COSTEDOPTON2:PLANTOARRESTTHEDECLINE

RESTRICTED

•  Thecostcentersandassets(fixedandmovable)oftheDepartmentofDefencewereanalysed.

•  Opportunitiesforcostreductionand/oradditionalrevenuegenerationwerescrutinisedincludingtheBudgetEfficiencyReportoftheDeputyMinister.

•  Inthefinalreport,theopportunitiesidentifiedandinvestigatedhavebeen

categorisedandgroupedaccordingtothefollowingcategories:

–  Opportunity1:IncreaseUNPeaceMissionreimbursementincome.

–  Opportunity2:GenerateIncome/savecostsfrommoveableassets.

–  Opportunity3:GenerateIncome/savecostsfrommedicalopportunities.

–  Opportunity4:ReduceHRcoststhroughrelatedinterventions.

–  Opportunity5:Utilisationofselectedendowmentproperties.

–  Opportunity6:Reductionofcostonleasedproperties.

–  Opportunity7:AlternativeutilisationofDPWProperty.

14

DEVELOPINGADEFENCEFUNDINGMODEL:METHODOLOGY

RESTRICTED

15

MTECPROPOSALS:ESTIMATEDREVENUEGENERATED

EstimatedRevenueGeneration:CostedOption2(FY17/18RandValue)

FY18/19 FY19/20 FY20/21 FY21/22 FY22/23 FY23/24

EstimatedRevenue:UN/AUReimbursement

R648902000 R684592000 R684592000 R684592000 R684592000 R684592000

ImprovementinUNMOAPerformance(Efficiencies)

R0 R178000000 R178000000 R178000000 R178000000 R178000000

UNHospitalisationCostRecovery R0 R8000000 R8000000 R8000000 R8000000 R8000000

EndowmentAssets R0 R0 R500000000 R1000000000 R1500000000 R1500000000

ReductioninDVehicles R0 R45000000 R0 R0 R0 R0

TransfersReceived R568540666 R599810403 R629800923 R661290969 R694355518 R729073293

SalesofGoodsandServicesofNon-CapitalAssets

R429481281 R452920466 R475962011 R499760112 R524748117 R550985523

TransfersinFinancialAssetsandLiabilities R69259071 R73066547 R76716744 R80552581 R84580210 R88809221

InterestandDividendsonRentofLand R3937779 R4154035 R4372285 R4590899 R4820444 R5061466

Fines,PenaltiesandForfeits R1209860 R1274043 R1332637 R1399269 R1469232 R1542694

SalesofCapitalGoods R27394249 R28900932 R30345978 R31863277 R33456441 R35129263

TotalofEstimatedAnnualRevenue R1748724906 R2075718426 R2589122578 R3150049107 R3714021962 R3781193460

RESTRICTED

•  LimitedscopeforsignificantrevenuegenerationbyDefence.

•  TheendowmentassetsarevaluedatR160bnwhichissubstantiallylowerthaninitiallyestimated.TheamountthatcanbeleveragedfromthisisestimatedatR1.5bnfromFY2020/21onwards.

•  Anyrevenuethatcanbegeneratedshouldhoweverbeavailabletooffsetcurrentexpenses.

•  Variousinstanceshavebeenidentifiedwherea“commercialmindset”couldsubstantiallybenefittheDefencefundingagenda.

•  Opportunitiesforinternalefficiencieshavebeenidentifiedthatshouldbeactioned.

•  Forcerationalisationisthelargestopportunityforreducingannualexpenditurebutthisrequiressignificantupfrontcosts-SubjecttothefinalisationoftheForceDesignandStructurerequirementsoftheDefenceForce.

•  TheFundingModeldoesprovideaclearpictureoftheoptionsandchallengesfacingtheDefencebudgetandthepotentialfortheimplementationoftheDefenceReview.

16

DEFENCEFUNDINGMODEL:KEYFINDINGS

RESTRICTED

•  DefenceFundingConundrum(DR2015mandatedriven-DR2020budgetdriven).

–  DevelopvaluepropositionforDefence.–  Clearlydefinecostsoffunctionsperformedandvaluedelivered.

–  Balanceprioritiesandbudgetagainstavailablefunds.–  Matchthedefenceambitiontotheavailableresources.

•  RevenueSourcesandRetention

–  Retentionofdefinedrevenuestreamsiscriticaltosupportexpenditureforecasts.

•  DefenceFacilitiesandImmoveableAssets

–  Determineavailablepropertyportfoliotothemarket.

–  Comprehensiveassessmentsoffacilityrequirementstodeterminesurplusfacilities.

•  Commercialisation

–  Allactivitiestobetestedintermsofcommercialmind-set.

17

DEFENCEFUNDINGMODEL:RECOMMENDATIONS

RESTRICTED

•  Costsavingsandpreventingwastage(MacroandMicrolevel).

•  Organisationefficiencyandstructuraldesign.

•  Personnelrejuvenationandrightsizing.

•  SDAdeliberatealignmenttothemilitarystrategy(ensurenoduplication).

•  Maximizereimbursements(UNandother).

•  Sweatingendowmentpropertyassetssurplustorequirement.

•  Focusonrepairandmaintenanceofoperationalvehicles.

•  OptimisingtheDODWorkscapability(NDPW).

•  Additionalallocationfromthefiscus.

ConsolidatedBTTMTECProposals

18RESTRICTED

EstimatedRequirementfromtheFiscus(FY17/18RandValue)

FY18/19 FY19/20 FY20/21 FY21/22 FY22/23 FY23/24

CurrentProjectedAllocation R50610314000 R50610314000 R50610314000 R50610314000 R50610314000 R50610314000

EstimatedAnnualAdditionalRequirement R2134774605 R7825986838 R8259261037 R8291017049 R11985022919 R14812234254

EstimatedCumulativeRequirement R2134774605 R9960761443 R18220022480 R26511039530 R38496062449 R53308296703

EstimatedAnnualRevenueGenerated R1748724906 R2075718426 R2589122578 R3150049107 R3714021962 R3781193460

EstimatedRequirementfromtheFiscus R386049699 R5750268412 R5670138459 R5140967942 R8271000957 R11031040794

ChangedRequiredYear-on-YearDefenceBaselineAllocationifEstimatedRevenueGeneratedisRetained

R50996363699 R58495357017 R66241213902 R73971304423 R85392354487 R100137417243

RequiredYear-on-YearDefenceBaselineAllocation

R52745088605 R60571075443 R68830336480 R77121353530 R89106376449 R103918610703

ProjectedHRShortfalltobeResolved R3258000000 R3258000000 R3258000000 R3258000000 R3258000000 R3258000000

19

MTECPROPOSALS:FUNDINGGAPANDREQUIREMENTFROMTHEFISCUS

WP3&4Attained

RESTRICTED

20

RISKANDIMPLICATIONS

•  IfSouthAfricaisunabletofundCostedOption2thenthe“redtrajectory”indicatedintheDR2015(Chapter9)becomesareality:

–  Asignificantlyreduceddefencecapability.

–  TheinabilitytocomplywiththeConstitutionalmandate.

–  ThelossofSouthAfrica’scontinentalgravitasandleadershiprole.

–  AsignificantlyreducedHRcomponent,withattendantimplicationsforsocialsecurityandwelfare.

–  Avastlyreducedspreadoforderedcommitments,includinglimitedbordersafeguarding(landandair)andlimitedmaritimesecurityandcontributiontoPHAKISA.

–  Asignificantreductiontothedefencemultipliereffecttothedevelopmentalstate(Industryetc).

RESTRICTED

21

CONCLUSION

•  TheBTTadoptedCostedOption2(asapprovedbytheMinisterandtheJointStandingCommitteeonDefence)asbeinganaccuratereflectionontheleveloffundingrequiredbydefenceforMS1‘ArresttheDecline’.

•  NotwithstandingthecurrentfiscalpressureandthatitisevidentthatthefiscuscannotsupportthefullimplementationofCostedOption2foratleastthenexttwoMTEFperiods,theBTTfurtherconcludedthat:

–  Althoughworkpackage5remainsimportant,thepriorityforanyadditionalfundingmustbedirectedatachievingworkpackages3and4.(R18.2bn)

–  AnyfundingthatmayemanatefromtherecommendationshereafterwillbeearmarkedbytheNTandtheDODforspecificinterventionsidentifiedandprioritisedinworkpackages3and4.

•  DGtoDGletterdd06April2018indicatesthatduetofiscalcircumstances,NTisunabletofundtheimplementationoftheDR2015overtheMTEF.

RESTRICTED

22

WAYFORWARD

•  WhilsttherequirementovertheMTEFwastoimprovetheDefenceallocationbyR18.2bn,theDODallocationhasinfactbeenreducedbyaneffectivereductionofR18.2bninitsallocationforthenextMTEFperiod.

•  GivenSouthAfrica’sfiscalconstraints,thefollowingdecisionshavebeenmade.

–  TheDR2015cannotbefundedasrequiredandonlythenon-costinterventionsarebeingimplemented.

–  RetentionofincomegeneratedthroughUNreimbursementsforoperationsisapprovedandconditionaltospendingtowards“ArrestingtheDecline”.

–  Principleapprovalfortheretentionofincomederivedfromthesweatingofassets,thedetailsofthisarestillunderdiscussionandfinalapprovalwillbesubjecttoregulatoryprovisionsprovidedbyNationalTreasury.

–  Anyfutureretentionofincomethatmaybeconsideredforapprovalwouldbesubjecttoitbeingearmarkedforinterventionsto‘ArresttheDecline’.

RESTRICTED

•  TheDR2015andthe‘PlantoArresttheDecline’remainsthelong-termvision,valuepropositionandpolicypositionasarticulatedbyCabinetandParliament.

•  Pragmatically,theDODhasenteredaneraofbudgetdrivenstrategyasopposedtothemandateapproachtodefenceplanning.

•  Intheinterestsofsustainability,

–  Short-termSurvival:Complywiththebudgetreductionandallocationceilingsintargetedareas.Thiscanonlybeachievedthroughsignificantreductionstothe8DefenceProgramsthroughbothcostcuttingandsavingsinterventionsinthecurrentconstruct.

–  BridgingandStabilisation:Reconfiguretowardsasteadystatesustainablefoundationforthefuture.Thiswillimplyaverydifferentassociatedvaluepropositionandstructuringproposal.

•  Informedbytheaboveposition,developanewDR2020toalignambitionwithavailableresources.

•  SouthAfricawillhavetoagreetoasignificantlyreducedlevelofdefenceambitionforthefutureandcorrespondinglyreduceitsexpectationsforthedefencefunction.

WAYFORWARD

23RESTRICTED

DISCUSSION

24RESTRICTED