Armscor Annual Report 2008/ 2009 and the Airbus A400M

Meeting report

Armscor Annual Report 2008/09 presentation
Mr Sipho Thomo (CEO – Armscor) said that the current Amscor board had been appointed in June 2008. The restructuring of Armscor had been completed though Defence Evaluation and Research Institute (DERI) implementation had been abandoned. Armscor had established a Service Level Agreement with the Department of Defence. Funding of Armscor came through the Department of Defence.

Mr Sipho Mkwanazi (Acquisitions – Armscor) said that, in terms of Armscor’s acquisitions, the last of three submarines was commissioned on 26 May 2008. All four Frigates were commissioned and operational tests and evaluations were in the final stages. Twenty-eight of the 30 light utility helicopters had been delivered. Regarding advanced light fighter aircraft, five Gripens had been delivered while intention was for all aircraft to be delivered by March 2012.  With lead-in fighter trainers, all 24 Hawk trainers had been delivered. All four Lynx (maritime patrol) helicopters had been delivered too. The development programme of the Airbus A400M’s was experiencing a delay of 48 months.

Regarding transformation, Armscor’s racial and gender profile had changed substantially over the past 10 years. The percentage of Black employees had grown from 17.9% in 1996 to 48.39%. The percentage of female employees had grown from 34.6% in 1996 to 38.45%. Of the external appointees, 65.2% were found in non-technical and 19.2% in technical groups. Regarding retention and rejuvenation, the age distribution of its employees remained a major risk area in terms of service delivery with the average age of technical personnel standing at 46 years.  Client satisfaction had also seen a significant improvement (from 87.9% in 2006 to 94.5% in 2008). With regards to safety, health and environment, all Armscor facilities were audited and, although all facilities had shown improvement, action plans were being developed to address shortcomings in the area. Armscor was also ISO listed, having retained its certification after audits conducted by the South African Bureau of Standards.

Armscor had received an unqualified Audit Report for the 2008/09 financial year, with no audit matters raised. Its total revenue increased by 44% to R2 103million. Its net asset value also increased by 4.7% to R552.5million. At approximately 85%, employee-related costs remained the highest cost-driver.

In terms of Armscor’s performance against goals set and the first goal - Capital Defence Matériel Acquisition excluding strategic defence acquisition but including technology acquisition - Armscor had exceeded its contracts to be placed objective and partially achieved its objective in terms of cash flow. With regards to Strategic Defence Acquisition, it had exceeded its objectives both in terms of contracts placed and cash flow. With System Support: Acquisition and Procurement, it had also exceeded its objectives in terms of both contracts placed and cash flow. Though it had also exceeded its objectives in terms of management of the Defence Industrial Participation (DIP) programme, it had not managed to achieve its objective with regards to management of Defence Technology, Research, Test and Evaluation requirements of the Department of Defence.

In terms of Black Economic Empowerment it had also exceeded its objective when it came to its operating budget and SDA and GDA Accounts. However, when it came to spending by Armscor business, its objective was only partially achieved. It had also exceeded most of its Human Resources targets. One target set (ensuring that at least 20% of external appointments in the technical functional groups were women) was partially achieved at only 19.23%.

Discussion
The Chairperson asked how much the 4-year Airbus delay would cost the taxpayer.

Mr Mkwananzi answered that it would cost R17 billion.

Mr D Maynier (DA) said that the 4-year delay would see the cost rising to R47 billion. Why was there no tendering process in the acquisition of the Airbus? What would the cost implication be for the taxpayer?

Mr Thomo answered that the decision not to undergo a tendering process was made by Cabinet. When the contract with Airbus was signed, the cost was R17 billion. Thus far, R2.9 billion had been spent. Airbus was also looking at increasing the costs. The estimated total cost would be R47 billion. There were two options in going forward: the State could either decide to absorb the costs or it could decide that the contract with Airbus was to be terminated. As, contractually, Armscor was only allowed up to December to terminate the contract, Cabinet would have to make its decision by November.

Mr Maynier asked what the cost would be if it was decided to terminate the contract.

Mr Thomo replied that Armscor had undertaken an agreement with Airbus to treat certain sensitive information delicately. This information was therefore not to be made available to the public. This placed Armscor in a difficult position as it had to account to the public. The issues that could not be discussed related only to future issues, however; past issues could be discussed more freely.

Mr J Lorimer (DA) asked whether the R1.5 billion had been paid irrevocably.

Mr Thomo answered that the payment of R1.5 billion had in fact been withheld from Airbus as a result of their failure to deliver (due to the aircraft’s engine failure).

The Chairperson said that Armscor should be allowed to brief the Minister on this issue. The Minister would then report to Parliament. The projected cost of R47 billion would be larger than the Defence Force’s annual budget. The Committee needed more details around this.

Mr Mkwanazi said that if Airbus failed to deliver they would have to pay penalties. Armscor had engaged Airbus to retain the right to terminate the contract and had met with them on the issue of cost escalation.

Mr Maynier asked why the Chairperson of Amscor’s contract had been renewed given the problems his being in position had caused.

The Acting Secretary of Defence, Mr Tsepe Motumi, answered that he was not competent to respond on the issue of contract renewal. This matter was for the Minister of Defence to deal with instead. This matter had, however, been settled before the changing of the Administration. If the Committee felt it needed to pursue this matter, it could do so.

The Chairperson said that it had become clear that it was vital for the Chairperson of the Board to appear before the Committee.

Mr Maynier asked what the CEO earned. Did the annual report disclose the CEOs full remuneration?
Mr J Grobler (CFO – Armscor) said that the CEOs total annual remuneration stood at R1 449 301.48

Mr Maynier asked what Armscor’s policy was on bonuses given to senior officials.

Mr Thomo replied that these questions were best directed to the Board.

The Chairperson asked who gave the CEO approval to have outside business interests.

Mr Thomo answered that all employees were required to declare their financial interests. If an employee wished to work for a company part-time, permission had to be granted for them to do so. He acknowledged that he was a shareholder, and therefore director, in a number of companies. He also bought and sold shares on the stock exchange. Although these companies had no link to Defence, he had declared all his financial interests.

The Chairperson asked how often the Secretary of Defence interacted with Armscor.

The Secretary of Defence answered that he held regular meetings with Armscor.

Mr Maynier asked whether Armscor had conducted an investigation into Operation Vistula.

The CEO answered that some policies had not been followed here and that, as a result, a disciplinary inquiry had taken place and had been completed. Discipline had been taken against those Armscor employees found guilty.

The meeting was adjourned.