Armscor annual report presentation

Meeting report

Chairperson's Opening Remarks
Mr S Montsitsi (ANC), who was elected as Acting Chairperson, provided some background information to Armscor. He indicated that Armscor was formed in 1968, during a time of turmoil, after international sanctions were passed by the United Nations (UN) against South Africa. Government at that time wanted to ensure it would be able to withstand any onslaught after sanctions. Because there was no way for South Africa to acquire arms, it had to build its own capacity. However, now that the situation had changed, it was now time for Arsmcor also to change its focus, away from producing weapons of offence to producing defensive weapons. The delegation from Armscor would inform the Committee about plans to transform Armscor, and discuss its challenges. He noted that the delegation included the Chairperson of the board of directors, the acting Chief Executive Officer, and several other members of the Armscor executive.

Armscor: Strategic Plan briefing
Lt-Gen (retired) Maomela Motau, Chairperson, Armscor, noted that this Committee was one of the most important stakeholders and thanked the Acting Chairperson for the opportunity to present the strategic plan.

He said that Armscor had a new board of directors, appointed by the shareholders, and had received a new mandate to reposition Armscor. The board came to the conclusion that the only effective way of reaching that objective was for the board to design a whole new strategy for Armscor. This would be further developed in the ensuing years and would be fully elaborated on, in July, but in the meantime he wanted to share the strategy with the Committee.

Mr Sipho Mkwanazi, Acting Chief Executive Officer, Armscor, outlined that he would give a background to Armscor, and then outline the strategic plan, its performance, and its challenges.

He noted that there were three main units within the Ministry of Defence and Military Veterans. Armscor was the designated acquisition agency, whilst the Department of Defence and the Department of Military Veterans were the other two units. Armscor was led by a Chairperson and a Board of directors, who were the accounting authority, and there was also a defence material tender board. Armscor was a Schedule Two public entity and had a shareholder’s compact, a three-year corporate plan, and a service level agreement with the Department of Defence (the Department or DOD). It published quarterly progress reports.

Armscor's mandate comprised of several key tasks. It had to acquire defence material on behalf of the Department of Defence, and manage technology projects as required by that Department. It fulfilled a role in providing quality assurance capacity. It established a system for tender and contract management, and a compliance administrative system, and also bore the responsibility of disposing of redundant, excess or forfeited defence material. It supported and maintained such strategic and essential defence industrial capabilities, resources and technologies as identified by the Department. It also provided defence operational research, established a Defence Industrial Participation programme management system, provided marketing support to defence-related industries, and managed other facilities identified as strategic by the DOD.
 
In order to execute those tasks, Armscor's functions were categorised into Armscor, the Armscor Defence Institutes, and the Armscor Dockyard.

Armscor had several strategic objectives, which sought to address funding and growth, people and capabilities, Broad-based Black Economic Empowerment (BBBEE), stakeholder relations, local industry support, and operational efficiency.

In relation to the funding and growth, Armscor was seeking ways to manage the fact that it had insufficient funding to carry out its full mandate. It had developed a cost management model, and looked at growth and income generation. Armscor had developed and implemented a cost model, and it was being used as a predictor of required capacity. The cost model would be finished later in 2011. In relation to the dockyard activities, a strategy was developed to exploit commercialisation opportunities and maximise the potential of operations.

The main challenge that Armscor faced, on the personnel front, was the loss and erosion of skills within Armscor. This was due primarily to retirements, resignations, and the fact that it was unable to attract new talent easily. The new strategy would determine how best to attract the necessary skills, develop and train skilled workers, increase employee satisfaction, and develop skills transfer training. Armscor wanted to secure a position as an employer of choice and create a positive organisational culture. This transformation would centre around a human resources (HR) strategy that would focus on affirmative action and BBBEE, manpower planning, remuneration management, skills development, building sound employee relations, and organisational wellness.

There were also challenges in relation to BBBEE, since there was currently insufficient transformation within Armscor and the defence industry generally. Armscor planned to address this strategic gap by developing a BBBEE plan that was in line with the Department of Defence's policies. Transforming Armscor to meet minimum standards would achieve internal compliance, but Armscor also sought industry-wide compliance, which would include its suppliers. Armscor was at a level six on the BBBEEE ratings, but hoped to improve to level four.

There were negative perceptions about Armscor, due to part to poor stakeholder relations in the past. The plan was to appoint a stakeholder relations manager, identify stakeholders, revisit the stakeholder engagement strategy, and improve Armscor's reputation. Stakeholders included Parliament, the South African National Defence Force (SANDF), and organised labour.

Another strategic goal was to seek local industry support. The challenge lay in creating sustainability of local capability, and overcoming the lack of local industry support. The strategy was to clarify with the industry what support it would require from Armscor, and support the local industry where possible, particularly through exports, by way of  exhibitions and defence committees.

Armscor also planned to address operational inefficiencies, including an outdated IT application system that currently lacked alignment and integration. Short-term plans had been implemented and Armscor was benchmarking other similar organisations for comparative analysis.

Mr Mkwanazi reported that most of the corporate goals were achieved or exceeded. All of the Special Defence Projects (SDP) performed well, and the focus then shifted to the final delivery, and operational tests and evaluations. Other Special Defence Account Projects also performed well, including the GBADS and Rooivalk projects. The Airbus A400M project was terminated due to delays and cost increases.

Whilst the full audit had not yet been completed, he could report that Armscor revenue increased nearly 11%, while the net asset value increased more than 3% to R553.7 million. Capital investment was at R43.6 million, which would maintain computer equipment, machinery, and facilities. The employee-related costs were the highest cost driver, accounting for 75% of total costs. The total operating budget was R932.4 million, with transfer payments at R720 million and other income at 187.3 million, leaving a shortfall of approximately R25 million.

Armscor devised several activities to address funding challenges, including performing a review of expenditures and processes, to ensure that available funding was spent on service delivery.

The appointment of a new Chief Executive Officer would soon be handled by the Board, who would make the necessary recommendation to the minister. The new Board of Directors had been appointed.

Mr Mkwanazi noted that the Airbus A400M project was terminated in November 2009, with the pre-paid payments due for payment in January 2010. Armscor had held several meetings with Airbus demanding these payments, but there were several challenges and delays. Firstly, Airbus disputed the right of termination, and attempted to link the purchase contract to the offset contract. Eventually, Airbus presented a schedule of proposed payments, and in October 2010, Armscor and Airbus reached an agreement to the effect that the proposed unconditional repayment schedule would be presented to the Armscor Board of Directors, with a proposal that the contract agreement be amended. Sensitive classified documents held by either party would be returned. The payment schedule would begin in January 2011, with five payments to be made by December 2012. Interest would accrue from the beginning of that schedule. However following that, Airbus had again sent a letter that again attempted to link the purchase and offset contracts, to which Armscor responded by sending a letter of demand seeking payment within 15 days. Before cancellation, Armscor had sought confirmation of the heavy airlift capability of the A400M. Alternatives were considered for the short-term, with a long-term strategy that would review the requirements by the South African Airforce (SAAF).

In response to funding challenges, Armscor planned to develop an acquisition value chain, create a cost model, and finalise a more detailed service level agreement with the Department of Defence. It was noted that improvements to efficiency could also lead to cost saving opportunities.

Discussion
Ms H Mgabadeli (ANC) wanted to see the job retention statistics, in order to be better apprised of who remained at Armscor, and who, and how many employees had left.

Mr D Bloem (COPE) asked for a breakdown on senior and junior level management, particularly the racial composition of those individuals.

Ms P Daniels (ANC) commented that the Board had its work cut out for it and that various difficulties had faced Armscor. She asked who the Armscor shareholders were.

Lt General Motau noted that Armscor's shareholder was the State, represented by the President and the Cabinet. The Minister of Defence was the representative of the shareholders.

Ms Daniels asked where Armscor disposed of its old material.

Mr Mkwanazi responded that there were several options. Equipment and materials could be destroyed if they were beyond the level of repair. Equipment could also be upgraded or sold on, if still usable.

Ms Daniels asked how many dockyards there were, who serviced them, and how Armscor would ensure that it could service the Navy.

Lt-Gen Motau noted that the decision to put the dockyard under Armscor was made by the Department of Defence.

Mr Mkwanazi added that Armscor's responsibility with the dockyard was primarily to service the South African Navy. If there was excess capacity, it could be commercialised. The dockyard also presented another challenge  of outdated equipment. New equipment was necessary, to render good services to the Navy.

Mr D Maynier (DA) wanted to know the total amount that Airbus owed Armscor, including interest. He wanted to know the total amount per installment for the pre-paid schedule. Finally, he wanted to know if Airbus threatened to withdraw work packages.

Ms Mgabadeli wanted an assurance that there was a promise for instalment payments from Airbus.

Lt-Gen Motau said that Armscor had met with Airbus the previous week. Airbus indicated that the delay in payment was not due to shortage of funds. Airbus could pay overnight if needed, but it wanted a relationship with Armscor. Armscor received an indication that Airbus would pay, and the relevant Minister in France had given his assurance that the bill would be paid. Armscor anticipated that this issue would be finalised soon.

Mr Mkwanazi noted that Airbus owed Armscor R2.9 billion in five equal installments. This figure did not include the additional interest costs.

Lt-Gen Motau wanted to clarify once more that Airbus was not trying to link the contract for the A400M with the purchase of commercial aircraft.

The Acting Chairperson noted that some of these questions would need to be addressed in the forthcoming strategy session

Lt-Gen Motau then made some further comments. He drew attention to the new board, saying that it was broadly representative. There were three female members, one white member, one person of Indian decent, and several black members on the Board. He also felt that there was a good relationship between the Board and the Acting Chief Executive Officer and hoped that this good relationship would persist when the new Chief Executive Officer was appointed.

Lt-Gen Motau also commented further on funding issues, saying that when it was clear that the funding was inadequate, Armscor almost turned into a buying office for the Department of Defence. However, it had looked again, and more broadly, at its mandate and strategies. Because surplus funds should have been regarded as net income, this should have been subjected to the decisions of shareholders.

Lt-Gen Motau also indicated that he did not want to give the impression that the BBBEE policy came only to the fore at this juncture, because of inattention to the lack of progress previously. Closely related to this issue was the challenge of attracting skilled workers. South Africa was short on skills, and needed to develop those throughout the country. The new strategy was to ensure Armscor was seen as an attractive place to work, so that it would be able to compete with other institutions, at a better level, for employees. Salaries, therefore, needed to be competitive. In short, Armscor needed to be efficient, effective, and economic.

Mr Mkwanazi added that in regard to the BBBEE, the Board was trying to ensure that Armscor was doing everything that would allow it to meet  a level four rating, and it hoped to do this within the next two years. In addition, Armscor needed to ensure it was attracting skilled workers. Part of that equation included paying workers more money. This would make it a more attractive organisation.

The Acting Chairperson suggested that the loss of personnel was attributable mostly to their age. He suggested looking into in-house recruitment programmes, in order to provide resources that would help Armscor keep skilled workers, and help them progress through the company.

The Acting Chairperson sought clarification on the status of the audit of Armscor, because it was key that the Committee get a good understanding of Armscor's financial status.

Lt-Gen Motau responded that the Auditor-General promised to go through the books expeditiously. Armscor also had to make its annual report to shareholders.

The Acting Chairperson enquired about good and poor relationships that Armscor may have with various companies.

Lt-Gen Motau explained that the primary client of Armscor was the Chief of National Defence. He said it was incumbent on Armscor to cultivate a good relationship there, and that so far it was productive and useful.

Mr A Maziya (ANC) wanted to know if the cost savings measures were contributing to the challenges that Armscor faced in attracting skilled employees. He also wanted to know where Armscor advertised job openings.

Mr Mkwanazi said that Armscor recruited in different ways, based on the level of competency and skills required. Junior positions were advertised in some national newspapers. He emphasised that Armscor’s cost savings were directed towards improving its internal efficiencies, and doing matters in a better way, and these did not extend to forgoing appointments or delaying worker training.

Mr Maziya asked for more detail on the conditions of purchase and termination of the Airbus A400M contract.

Lt Gen Motau said that the Airbus contract included mechanisms for dispute resolution and cancellation. While it might seem as if the process was slow, Armscor had several steps it needed to follow, with arbitration being the final step. He assured the Committee that Armscor was doing all it could to get the money back.

Mr Maynier asked the Chairperson of Armscor if he had any conflicts of interest relating to his personal business interests.

Lt-Gen Motau responded to concerns about a conflict of interest. He noted that every Member of the Board came from different backgrounds and persuasions. He was convinced that the shareholders were satisfied that there no conflicts of interest. There was a requirement that all Board nominees must declare possible conflicts, and so far that procedure had been followed.

Mr Maynier wanted to see the short list of the candidates for the position of Chief Executive Officer.

Lt-Gen Motau answered that Armscor would not release a short list of candidates, because he felt it would be unethical to do so. Those candidates should not be informed through the process of Parliament, but through Armscor. The shortlisted candidates were chosen on merits, and would be evaluated on that basis again, in making the final selection of the Chief Executive Officer.

Mr Maynier asked about the acquisition of VIP jets, saying that the Department of Defence was in the process of buying two jets, for R800 million. He wanted to know if Armscor had played a role in this project, and what the status of that project was.

Lt-Gen Motau said that the issue of the VIP jets had not reached the board, and this was something the Committee should take up with the Department of Defence.

Ms Daniels asked for more information about Armscor's research efforts, as well as the strategic facilities with whom Armscor dealt.

Mr Mkwanazi stated that Armscor did research for all branches of the South African military.

Lt-Gen Motau said that Armscor had the responsibility to maintain strategic facilities. He noted also that Armscor was also required to consider all international agreements and protocols when it authorised the sale of weapons. Armscor would make its view known to the Committee, which would make the final decision. There was not a specific list of countries which could purchase weapons from South Africa, but there were countries that were banned from doing so.

Mr L Nzimande (ANC) indicated that there were challenges in meeting compliance with UN standards for its military equipment. He wanted to know if Armscor dealt with this issue.

Lt-Gen Motau responded that maintenance of equipment was within the responsibilities of Armscor during the life cycle of the equipment.

Mr Maziya commented that he felt that there was not sufficient clarity on some of the issues, with the delegation responding simply by saying that the issue would be raised in the forthcoming strategy session.

Mr Bloem also expressed displeasure with the references to the upcoming strategy session. He said there had been too much window dressing that did not help. Specifically, he questioned whether Armscor was presenting a “black layer” of people as the face of Armscor, when really there were people in the back making the decisions. He said that care needed to be taken to ensure it did not keep the old apartheid mould.

Lt-Gen Motau acknowledged that there were some broad questions which expressed the Committee’s unhappiness on certain issues, but he asked that Members should be patient, and said that the Board had assumed responsibility for certain of the previous board's activities. He thought that the new Board would build on the strengths of the previous Boards, and would seek to make proper decisions. When he had been appointed, the Minister tasked the Board with repositioning Armscor. He said the Board intended to do that, and wanted to be accountable to the Committee. He wanted to report back to the Committee as the Board charted its way forward.

Mr Bloem proposed that perhaps this meeting, which had run over time by an hour, should be closed, with another meeting scheduled during the recess, so that Members could meet their other obligations for that day.

Mr Maynier suggested that Mr Bloem could simply leave the meeting if he had other commitments.

The Acting Chairperson confirmed that this would not be necessary.

Mr Maynier said his questions had not been answered. He still wanted to know about the total amount that Airbus owed Armscor, including interest.

He also complained that the Chairperson had not given a direct answer on his own potential conflicts of interest.

Mr Maynier complained that Armscor's response to the VIP jet project was inadequate.

Mr Nzimande said his question was not answered, and that he hoped he would get an answer from the Department of Defence.

The meeting was adjourned.