DEPARTMENT OF DEFENCE AND NATIONAL TREASURY BUDGET TASK TEAM 09 NOVEMBER 2018 BRIEFING ON DOD FUNDING MODEL FOR THE DR2015 RESTRICTED
DEPARTMENTOFDEFENCEANDNATIONALTREASURYBUDGETTASKTEAM
09 NOVEMBER 2018
BRIEFINGONDODFUNDINGMODELFORTHEDR2015
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• Context
• IntroductionandFocusofEffort.
• CriticalAssumptions.
• SequenceofWork.
• PlantoArresttheDeclineandLogicModel.
• BalancedEvolutionandFundingRequirementoftheSANDF.
• CostedOption2.
• DefenceFundingModel.
• EstimatedRevenueGenerated,FindingsandProposals.
• RequirementsfromtheFiscus.
• RisksandImplications.
• Conclusion.
• WayForward.
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SCOPE
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INTRODUCTION
• AspartoftheimplementationoftheDefenceReview2015(DR2015)andinresponsetoaMinisterialDirective,aprocesstodevelopa‘fundingmodel’fortheDODwasstarted.
• The‘fundingmodel’exercisewasintendedtoexplorenon-traditionalrevenuestreamstosupplementtheDefencefundingallocationfromNationalTreasurysoastoenabletheimplementationoftheDR2015.
• TheinvestigationwascompletedinAugust2017withtherecommendationsthatwillbediscussedinthispresentation.
• Inaddition,onthe23rdOctober2016,anInterdepartmentalDOD/NationalTreasuryBudgetTaskTeam(BTT)wasestablishedontheinstructionoftheDG’sofbothNTandtheDODtoexplorefundingtrajectoryoptionsto‘ArresttheDecline’intheDOD.
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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
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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
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• TheDefenceReview2015isSouthAfrica’snewDefencePolicyandassuch,thewaysandmeanstofunditovertimewouldbelookedat.
• TheDepartmentofDefence(DOD)developedthe‘DODPlantoArresttheDecline’togiveeffecttoMS1oftheDR2015“ArrestingtheDecline”.
• TheMinisterofDefenceapproved‘CostedOption2’ofthe‘DODPlantoArresttheDecline’.CostedOption1andOption3oftheplanwereconsideredtobeunviableduetoimpracticaltimeconsiderations.
• TheapprovedplanwasscrutinisedbytheBTTtodeterminefundingsolutionsforimplementation.
• ThefocusofthedeliberationsweretodeterminewhatcouldbefeasibleandexecutableoverthenexttwoMTEFplanningcycleperiods.
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FOCUSOFEFFORT
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CRITICALASSUMPTIONS
• TheassumptionsforCostedOption2areasfollows:
– Year1fortheimplementationofDR2015is2018/19
– Inflationhasnotbeenincludedandtherequirementhasbeendeterminedinrealtermson2016/17prices.
– ThefiguresreflecttheoperationalburdenoftheSANDFexpandedoveraperiodofsixyears.
– Itfollowsanapproachofsignificantramp-upofthebudgetallocationtoallowforcapacitybuildingandindustryresponse.
– Theallocationoffundsshouldbewithintheprioritisationlogicthathasbeenfollowedandreferredtoasa‘balancedevolution’processthatwillbeexplainedduringthispresentation.
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• Thefollowingaspectswereunpackedanddiscussedindetail:
– The‘DODPlantoArresttheDecline’togetherwithitsfullfundingrequirement.
– Identificationofcriticalprioritiesforfundinginterventions.
– Identificationofareasinwhichefficiencyandcostsavingscouldberealized.
– Abetterunderstandingofthereducedfundingpotentialderivedfromtheopportunitiesidentifiedinthedevelopmentofthe‘FundingModel’.
• Thefollowingelementswerediscussedinbroad:
– TheCOEissuesandtheHRfootprintbasedonthecabinetdecisiontoreducegovernmentemployeesandanunderstandingofthedilemmasthattheDODhasinthisdomain.
– AhighleveloverviewoftheSDAandhowitismanagedincludingthereasonsforroll-oversofpartsofthefundstherein.ThedetailcontainedintheSCAMPwasnotmadevisibleinthediscussions.
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BTTSEQUENCEOFWORK
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DODPLANTOARRESTTHEDECLINE
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LOGICMODELFORTHEPLANTOARRESTTHEDECLINE(MS1)
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MeasuresfortheBalancedEvolutionoftheSANDF
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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
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COSTEDOPTON2:PLANTOARRESTTHEDECLINE
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• Thecostcentersandassets(fixedandmovable)oftheDepartmentofDefencewereanalysed.
• Opportunitiesforcostreductionand/oradditionalrevenuegenerationwerescrutinisedincludingtheBudgetEfficiencyReportoftheDeputyMinister.
• Inthefinalreport,theopportunitiesidentifiedandinvestigatedhavebeen
categorisedandgroupedaccordingtothefollowingcategories:
– Opportunity1:IncreaseUNPeaceMissionreimbursementincome.
– Opportunity2:GenerateIncome/savecostsfrommoveableassets.
– Opportunity3:GenerateIncome/savecostsfrommedicalopportunities.
– Opportunity4:ReduceHRcoststhroughrelatedinterventions.
– Opportunity5:Utilisationofselectedendowmentproperties.
– Opportunity6:Reductionofcostonleasedproperties.
– Opportunity7:AlternativeutilisationofDPWProperty.
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DEVELOPINGADEFENCEFUNDINGMODEL:METHODOLOGY
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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
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• LimitedscopeforsignificantrevenuegenerationbyDefence.
• TheendowmentassetsarevaluedatR160bnwhichissubstantiallylowerthaninitiallyestimated.TheamountthatcanbeleveragedfromthisisestimatedatR1.5bnfromFY2020/21onwards.
• Anyrevenuethatcanbegeneratedshouldhoweverbeavailabletooffsetcurrentexpenses.
• Variousinstanceshavebeenidentifiedwherea“commercialmindset”couldsubstantiallybenefittheDefencefundingagenda.
• Opportunitiesforinternalefficiencieshavebeenidentifiedthatshouldbeactioned.
• Forcerationalisationisthelargestopportunityforreducingannualexpenditurebutthisrequiressignificantupfrontcosts-SubjecttothefinalisationoftheForceDesignandStructurerequirementsoftheDefenceForce.
• TheFundingModeldoesprovideaclearpictureoftheoptionsandchallengesfacingtheDefencebudgetandthepotentialfortheimplementationoftheDefenceReview.
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DEFENCEFUNDINGMODEL:KEYFINDINGS
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• DefenceFundingConundrum(DR2015mandatedriven-DR2020budgetdriven).
– DevelopvaluepropositionforDefence.– Clearlydefinecostsoffunctionsperformedandvaluedelivered.
– Balanceprioritiesandbudgetagainstavailablefunds.– Matchthedefenceambitiontotheavailableresources.
• RevenueSourcesandRetention
– Retentionofdefinedrevenuestreamsiscriticaltosupportexpenditureforecasts.
• DefenceFacilitiesandImmoveableAssets
– Determineavailablepropertyportfoliotothemarket.
– Comprehensiveassessmentsoffacilityrequirementstodeterminesurplusfacilities.
• Commercialisation
– Allactivitiestobetestedintermsofcommercialmind-set.
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DEFENCEFUNDINGMODEL:RECOMMENDATIONS
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• Costsavingsandpreventingwastage(MacroandMicrolevel).
• Organisationefficiencyandstructuraldesign.
• Personnelrejuvenationandrightsizing.
• SDAdeliberatealignmenttothemilitarystrategy(ensurenoduplication).
• Maximizereimbursements(UNandother).
• Sweatingendowmentpropertyassetssurplustorequirement.
• Focusonrepairandmaintenanceofoperationalvehicles.
• OptimisingtheDODWorkscapability(NDPW).
• Additionalallocationfromthefiscus.
ConsolidatedBTTMTECProposals
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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
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MTECPROPOSALS:FUNDINGGAPANDREQUIREMENTFROMTHEFISCUS
WP3&4Attained
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RISKANDIMPLICATIONS
• IfSouthAfricaisunabletofundCostedOption2thenthe“redtrajectory”indicatedintheDR2015(Chapter9)becomesareality:
– Asignificantlyreduceddefencecapability.
– TheinabilitytocomplywiththeConstitutionalmandate.
– ThelossofSouthAfrica’scontinentalgravitasandleadershiprole.
– AsignificantlyreducedHRcomponent,withattendantimplicationsforsocialsecurityandwelfare.
– Avastlyreducedspreadoforderedcommitments,includinglimitedbordersafeguarding(landandair)andlimitedmaritimesecurityandcontributiontoPHAKISA.
– Asignificantreductiontothedefencemultipliereffecttothedevelopmentalstate(Industryetc).
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CONCLUSION
• TheBTTadoptedCostedOption2(asapprovedbytheMinisterandtheJointStandingCommitteeonDefence)asbeinganaccuratereflectionontheleveloffundingrequiredbydefenceforMS1‘ArresttheDecline’.
• NotwithstandingthecurrentfiscalpressureandthatitisevidentthatthefiscuscannotsupportthefullimplementationofCostedOption2foratleastthenexttwoMTEFperiods,theBTTfurtherconcludedthat:
– Althoughworkpackage5remainsimportant,thepriorityforanyadditionalfundingmustbedirectedatachievingworkpackages3and4.(R18.2bn)
– AnyfundingthatmayemanatefromtherecommendationshereafterwillbeearmarkedbytheNTandtheDODforspecificinterventionsidentifiedandprioritisedinworkpackages3and4.
• DGtoDGletterdd06April2018indicatesthatduetofiscalcircumstances,NTisunabletofundtheimplementationoftheDR2015overtheMTEF.
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WAYFORWARD
• WhilsttherequirementovertheMTEFwastoimprovetheDefenceallocationbyR18.2bn,theDODallocationhasinfactbeenreducedbyaneffectivereductionofR18.2bninitsallocationforthenextMTEFperiod.
• GivenSouthAfrica’sfiscalconstraints,thefollowingdecisionshavebeenmade.
– TheDR2015cannotbefundedasrequiredandonlythenon-costinterventionsarebeingimplemented.
– RetentionofincomegeneratedthroughUNreimbursementsforoperationsisapprovedandconditionaltospendingtowards“ArrestingtheDecline”.
– Principleapprovalfortheretentionofincomederivedfromthesweatingofassets,thedetailsofthisarestillunderdiscussionandfinalapprovalwillbesubjecttoregulatoryprovisionsprovidedbyNationalTreasury.
– Anyfutureretentionofincomethatmaybeconsideredforapprovalwouldbesubjecttoitbeingearmarkedforinterventionsto‘ArresttheDecline’.
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• TheDR2015andthe‘PlantoArresttheDecline’remainsthelong-termvision,valuepropositionandpolicypositionasarticulatedbyCabinetandParliament.
• Pragmatically,theDODhasenteredaneraofbudgetdrivenstrategyasopposedtothemandateapproachtodefenceplanning.
• Intheinterestsofsustainability,
– Short-termSurvival:Complywiththebudgetreductionandallocationceilingsintargetedareas.Thiscanonlybeachievedthroughsignificantreductionstothe8DefenceProgramsthroughbothcostcuttingandsavingsinterventionsinthecurrentconstruct.
– BridgingandStabilisation:Reconfiguretowardsasteadystatesustainablefoundationforthefuture.Thiswillimplyaverydifferentassociatedvaluepropositionandstructuringproposal.
• Informedbytheaboveposition,developanewDR2020toalignambitionwithavailableresources.
• SouthAfricawillhavetoagreetoasignificantlyreducedlevelofdefenceambitionforthefutureandcorrespondinglyreduceitsexpectationsforthedefencefunction.
WAYFORWARD
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DISCUSSION
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