Armscor on its strategic overview / issue of the Chief Executive Officer

Meeting report

The Order Paper had announced a briefing to the Committee by the National Conventional Arms Control Committee on its activities since its reconstitution following a request from the Democratic Alliance. However, in a last-minute change of agenda, this was replaced by a briefing by Armscor’s Board of Directors and Management Board on Armscor’s strategic overview 2009/2010. This was a sequel to the Committee’s meeting on 14 October 2009 to discuss Armscor’s 2008/09 Annual Report in which the Committee, dissatisfied at the absence of the Chairperson of the Armscor Board and Board members, had called for a meeting to be held with the Board as soon as possible. The Chief Executive Officer arrived late without explanation and was reluctant to participate in the meeting.

Commemoration of Remembrance Day (11 November)
Mr D Maynier proposed that the Committee stand in a moment of silence to commemorate Remembrance Day, a day of remembrance of those who had fallen in all wars.

Armscor presentation
Dr Popo Molefe, Chairperson of the Armscor Board of Directors, introduced the delegation, and acknowledged the presence of Mr Tsepe Motumi, the Acting Secretary for Defence.

Armscor’s mission was to meet the acquisition, maintenance and disposal needs of the South African Department of Defence and Military Veterans (DOD) and other clients in terms of defence materiel, related products and related services. Armscor maintained strategic capabilities and technologies and promoted the local defence-related industry. Armscor was currently a Schedule 2 Public Entity and reported directly to the Minister of Defence and Military Veterans (the Minister). The Accounting Authority was the Board of Directors (the Board) appointed by the Minister and had two separate roles and functions, namely: to act as a tender board; and to ensure corporate governance. It had the following subcommittees: Executive Committee, Audit and Risk Committee, and Human Resources Committee.

Dr Molefe said that the Executive Committee was a special committee established to deal with sensitive matters. It consisted of two Board members – Mr R Meyer and he; and Mr Sipho Mkwanazi, the Chief of Acquisitions. Resolutions of the Executive Committee were required to be ratified by the full Board.

Armscor’s role was to promote efficiency and accountability with regard to Defence acquisition projects by providing the following support functions: project management, financial management, legal services, project security, and management of intellectual property.

Armscor received a transfer payment from the DOD which was insufficient and did not cover the cost of running the organisation. The decreased defence budget posed a whole range of constraints. The Board was continuously engaging the DOD to address the problem. Internally, the organisation was also continuously looking at ways to improve its processes and structures. It was taking the initiative to investigate and finalise the funding model, investigate the commercialisation of the Dockyard to supplement funding from the DOD, and evaluate the leverage of assets (development of Armscor land).

Armscor was faced by a number of challenges, such as erosion of skills, an ageing workforce (many employees over 50 years of age), difficulty in attracting young talent and generally a shortage of critical skills. To address these challenges certain strategic interventions were put in place: transformation and rejuvenation, training and Development, retention and employee satisfaction, mentorship and succession planning.

Armscor sought to address the industry transformation challenges by ensuring the following: broad-based black economic empowerment (BBBEE) monitoring and control systems, and enforcement of the BBBEE balance scorecard. Armscor was giving a number of bursaries to students but did not think that its efforts were sufficient. It needed more money for this purpose. It noted that suppliers who were the sole source of supply for specialised products tended to circumvent BBBEEE requirements.

Support of local industry was one of the Board’s priority areas. The Board was concerned that large percentage of tenders went to foreign companies. To address this challenge the Board was: developing a strategy to ensure support of local industry thus strengthening specific skills and retaining skills, and engaging with relevant role-players in the industry.

The Board sought a common approach. It noted that the defence industry in which it was operating was no longer ‘a bipolar world’. It had become ‘unipolar’ with the end of the Cold War. Moreover, there had been a rapid movement towards resolving conflicts peacefully. Thus there was a smaller market for the defence industry. This had led to a trend towards consolidation and the formation of joint companies. The South African defence industry was not immune to that trend.

By way of operational improvement, the Board’s focus was to improve efficiency and productivity by establishing a productivity management system and an information management strategy. The Board had adopted its information technology renewal plan.

To ensure compliance with corporate governance principles, the following had been established: shareholder compact, Board charter, committees’ charter, an internal audit plan, corporate risk management plan (risk register), a fraud prevention plan, and legislative compliance assessments.

With regard to stakeholder relations, which were of critical importance to Armscor, the Board sought to create a shared vision within the Defence Industry: a stakeholder engagement strategy had been developed which took into account all relevant stakeholders; and Armscor was streamlining communication strategies to enhance stakeholder relations. It sought to change the public’s mindset, so that when people spoke about the defence industry they would not suspect corruption. The outcomes that Armscor wanted were those which made South Africa a better country.

Armcor’s three key challenges were: Insufficient funding, shortage of critical skills, and sustainability of the local defence industry.

Discussion
The Chairperson asked where Mr Sipho Thomo, the Chief Executive Officer was.

Dr Molefe replied that although Mr Thomo had been present in the hotel the previous evening nobody had a clue where Mr Thomo was that morning. Therefore most questions would be answered by Board members.

A Member said that the Committee would have appreciated an earlier submission of the presentation.

Mr A Mlangeni (ANC) said that he was not going to make any demands on Armscor. According to the Annual Report, funding had decreased; he feared that this might compromise the mandate of the organisation. He asked if the Board believed that the mid-term budget statement was enough for its financial needs. He asked if Armscor would consult the Minister of Finance and the National Treasury to secure their support for the growth of Armscor’s industry. He said that otherwise the presentation was a good one.

Mr Gerhard Grobler, Member of the Board of Directors and Chief Financial Officer responded that Armscor had requested additional funding but had looked at different funding models. It still had a deficit budget for this year and the next year.

Mr Maynier said that the presentation was an introduction at the strategic level, but it was none the less necessary to tackle the problems of management, especially those of the Chief Executive Officer and his style of management and leadership. At the previous meeting the Chief Executive Officer had seemed to indicate that being chief executive officer of Armscor was a part-time job and that he enjoyed trading shares. The Board had not dealt with the problem of paying performance bonuses. He asked if the Board had confidence in the Chief Executive Officer. Based on her remarks, as he understood them, it appeared to Mr Maynier that the Minister lacked confidence in Mr Thomo.

A Member addressed her first comment to Mr Thomo. She could not understand how he used the Committee’s money to come to Cape Town, stay in a hotel and yet arrive late at the meeting. She felt that he was undermining the Committee. Mr Thomo had to take the Committee seriously. This was the Portfolio Committee on Defence and Military Veterans which was accountable to the public. He was accountable to the Committee as the Chief Executive Officer of Alexkor.

Armscor responded that the Chief Executive Officer had been required to undergo some training on how to lead an organisation. He had been introduced to talented experts in the field, and they attempted to help him, but he was reluctant.

Dr Molefe said that the full Board had met with Mr Thomo and told him that as long as he remained he was ‘taking us down’. The Board had asked him to resign. However, he had not come back to the Board with an answer. Therefore the Board would have to explore other options.

The Chairperson said that the matter should be left at that level.

Mr Maynier said that discussion on this matter should be concluded and the Committee should move on to other questions.

A Member asked how the Board was constituted. Did the Minister appoint them? She asked how the Board decided what was good for South Africa, and if it engaged with the Treasury.

Armscor responded that the Board was appointed by the Minister.

A Member welcomed the presentation. She asked how much the bursaries amounted to. 

Armscor responded that it currently had parallel programmes to attract skills, including bursaries, and medical aid and pension. However, the challenge of how, with limited resources, to maximise the benefits remained. Some of the issues included how to mentor from a management perspective.

Mr J Lorimer (DA) asked if a report had been prepared on Operation Vistula and if charges had been laid. It seemed that the process of bringing those responsible to account had been bungled.

The Chairperson asked Mr Lorimer to repeat his question.

Mr Lorimer asked who was responsible for the bungle.

Mr Sifiso Msibi, member of the Armscor Board of Directors, said that Armscor had been disappointed with Operation Vistula. However, the Board was not in a position to punish the members of staff concerned. Having taken advice from senior counsel, it was found that the evidence presented was not sound enough. As a result, the matter was closed and a report submitted to the Human Resources Committee of the Board. Those who had prepared the charges had not supplied sufficient information, and thus the presiding officer found no basis for a verdict of guilty.

Mr C Kekana (ANC) asked if Armscor was partially self-sustaining, or if it was partially subsidised by the Government.

Mr Msibi replied that Armscor was not a commercial institution. It was purely an entity operating on behalf of the Government to procure the needs of the Government. It was not self-funding.

Mr L Tolo (COPE) said that he learned from slide 8 that support of the industry was a priority and that a large proportion of tenders were awarded to foreign companies. He asked who was responsible for that decision to ignore the local companies. He asked who was responsible – the Board, the Minister, or the President. 

Dr Molefe replied that procurement was the work of Armscor. Requirements were determined by the Department of Defence, which worked in co-operation with Armscor. There was a range of technology involved. 

Mr Mkwanazi, General Manager for Acquisitions, said that Armscor followed a process. However, it also used value systems. When it had acquired defence packages, it was acquiring platforms. There were sub-systems manufactured in South Africa. An example was the Hawk aircraft. He admitted a tendency to buy from overseas than to buy locally. Needs were defined by Armscor’s clients, for example the South African National Defence Force. They defined their requirements based on needs and affordability.

Mr Mlangeni said that he did not see any evidence of empowerment of local companies.

A Member asked what the foreign companies had to offer.

Mr Msibi replied that Armscor had been concerned about equipment that had been procured largely from European suppliers. The problem was that local industry suffered. There was need of a concerted effort to favour local industry. Unless South Africa as a country took a stand, there would never be a change towards creating opportunity for the local industry.

Mr Thomo apologised for his late arrival [after one hour of the meeting being in progress]. He said that Armscor was just looking at capacitating the industry. In other countries, governments assumed a protective role. South Africa was different. What Mr Msibi had said on the subject was correct.

Dr Molefe replied that Armscor would ask the Minister to propose certain amendments to enable it to achieve its objectives. The Portfolio Committee would play an important role. There were elements in the law that made it difficult.  Armscor would not compromise on quality. He assumed that these similar questions of Members had been answered. 

Mr L Diale (ANC) asked about Armscor’s stakeholders.

Ms Veruschka September, Member of Armscor’s Board of Directors and a member of the Human Resources Committee, said that Armscor has identified key stakeholders in the industry: these included Parliament, the defence industry as a whole, other Government departments, the employees, the unions, and the media. 

A Member asked about human resources and the role of the National Youth Development Agency.

Mr Msibi said that the Human Resources Committee understood its role to be oversight, and as such it had been concerned about transformation. Armscor was an old organisation but it had programmes to replace senior staff, the majority of whom were over 50 years old. Armscor had difficulty in training engineers. The other challenge was to retain those employees in positions that did not pay as well as law or accountancy. Armscor was examining ways of having people shadow others. The position of General Manager for Human Resources had been filled.

Mr Thomo said that a General Manager for Human Resources had been appointed. There was one other position for which Armscor was currently recruiting.

The Chairperson expressed his confidence in the Board and advised the Committee that the matter should be left in the Board’s capable hands. The Committee could proceed with other issues.

Dr Molefe replied that Armscor was advised to work with the National Youth Development Agency and define it as one of their stakeholders. 

A Member asked about the Airbus A400M. 

Dr Molefe replied that the Board had decided to terminate the contract and a letter had been issued under the signature of the Chief Executive Officer. Armscor wanted to recoup its expenditure, and as stated in a meeting of the Joint Standing Committee there would be penalties. He had consulted Armscor’s legal advisor.

Mr Kekana said that a key issue for the Pan African Parliament was beneficiation and the need to break away from dependency. The whole of Africa was underdeveloped, while the people who benefited were overseas. He asked Armscor to please identify the legislation to be changed. This issue of South Africa’s own resources was key to breaking the structure of dependency. It should have been done a long time ago while there was potential to do so.

Mr Maynier referred to page 20 of the Annual Report, in which Armscor said that engineering changes were being made. These would take the project well into 2010. He asked someone on the Board to decode that paragraph and tell him what changes were made. Then he asked about the system referred to on page 22. There were serious delays of 37 months and he asked what accounted for these. He asked about the acquisition of the combat vehicle. He asked about a reference on page 54 of the Annual Report to litigation.

Mr Maynier said that the acquisition of the Airbus A400M raised a question of policy. He asked if the Department of Defence and Armscor had a policy on how major arms acquisitions should take place. He wanted to be convinced as to what went wrong on the acquisition of the Airbus and if lessons could be learned from this.

The Chairperson advised Mr Maynier that the decision to cancel the Airbus A400M was a Cabinet decision. If the Board members could not enter into detail, Mr Maynier should not complain.

Mr Mlangeni asked what the core functions of Armscor were, and if it was considering other options now that the A400M Airbus had been abandoned.

Dr Molefe wanted to place on record that Armscor had cancelled the contract for the Airbus A400M in its capacity as contracting agent. The Government was not a contracting party. Armscor was the party that informed the second party that it was cancelling the contract. Armscor was considering new options. The determination was that heavy lifting equipment was needed by the South African Air Force and the Department of Defence but at the moment it was not possible to proceed

Mr Lorimer asked about the new fighting vehicle, and how committed Armscor was to Phase 2, and if it was examining an alternative because the financial situation was likely to delay the programme. 

Armscor responded that in terms of the new generation combat vehicle, it was reported that there could be delays with Phase 1. The suppliers, Denel, had begun to find problems with the communications system. There were problems with the software. As part of corrective measures, Denel was examining improving its staff complement. Armscor was holding regular meetings with Denel’s management. The delay would be six months or so, and Armscor would have to revise the schedule. The second phase was based on the production, and still needed to be finalised by the army.

Mr Diale asked the reasons for the increase mentioned on page 16 of the Annual Report. He asked what equipment was sold to whom.

Mr Grobler replied that the increase was in the sale of goods. Importation of equipment was part of the fee that they rendered. He could supply a detailed list. The increase was basically in the previous year.

Mr Maynier said that his question on the frigates was specific. He asked Mr Grobler what exactly the options were in respect of the contract.

Mr Diale asked about the procurement of helicopters on behalf of the South African Government

Dr Molefe responded that he did not have specific details.

Mr Kekana said that it was necessary to remind Armscor that South Africa was an important country on this African continent. The country needed to be strong, and the army needed to be strong. South Africa needed to be able to defend itself.

The Chairperson expressed his wish that the issue of the Chief Executive Officer be resolved quickly.

The Chairperson thanked Members and the Armscor Board. He also thanked representatives of the media for their presence, and the Parliamentary Monitoring Group for taking notes.

The meeting was adjourned.