ARMSCOR & Castle Control Board Strategic and Annual Performance Plans 2013

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Defence and Military Veterans

23 April 2013
Chairperson: Mr A Maziya (ANC) (Acting)
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Meeting Summary

The Castle Control Board presented the annual performance plan for the 2013/14 financial year.  The presentation gave a strategic overview of the situational analysis, the revised legislative and other mandates of the Castle and an overview of the 2013/14 budget and medium term expenditure framework estimates.  Details were provided of the plans for the four main programmes and sub-programmes.  The major challenges were the need for adequate human resource capacity, alignment of the organisational structure with the strategy and mandates, the maintenance of the Castle structure, formalisation of the relationship with various stakeholders, implementation of corporate governance requirements and the financial sustainability of the Castle.  The Castle received no funding support from Government.  The estimated expenditure for 2013/14 was R4.16 million.  An Executive Director was recently appointed.

Members asked questions about the adequacy of visitor revenue; whether previous instances of non-compliance to legislative requirements were addressed; the management of assets; the staff shortage and the development of human resources; the basis for the calculation of depreciation; the payments made to consultants; the repairs and maintenance programme and the responsibility for maintenance of the castle; the alignment of an educational programme with the Western Cape schools’ curriculum; the organogram of the Castle Section and which positions were vacant and the marketing of the Castle.

The Armaments Corporation of South Africa Soc Ltd presented the corporate plan for the 2013/14 financial year.  The presentation included an overview of the ARMSCOR functions; the four strategic themes; the strategy initiatives; the strategic objectives and key performance indicators and the financial performance for the 2012/13 fiscal year.  Current challenges included revising the financing model of ARMSCOR; the renewal of application systems; the alignment and integration of IT systems; the improvement of human resource capacity, skills development and skills retention programmes and addressing the poor perceptions of the organisation.
Total assets amounted to R3 038.4 million as at 31 March 2013.  Total estimated income for 2012/13 was R1 030.6 million.  Total estimated operating expenditure was R931.3 million.  The estimated net surplus was R75.5 million.

Members asked questions about the delay in the appointment of a CEO; the IT systems; the cash flow generated from operations; the Defence Industrial Participation credits; whether an asset register was in place; the progress made in the ergonomics, “Hoefyster”, “Assegai” and “Vistula” projects; the acquisition of VIP aircraft; risk management and the mitigation measures in place; health and safety violations; gender equality targets; staff retention measures; staff development initiatives; the approach to failed states in Africa; the Simonstown dockyard; the relationship with the SANDF and DENEL; the revised funding model for ARMSCOR and security breaches at the ARMSCOR head office in Pretoria.  The Committee was concerned over allegations made during oversight visits that outdated equipment was supplied to the Defence Force.

Meeting report

Briefing the Castle Control Board (CCB)
Lt Gen J.T. Nkonyane, Chief of Logistics, SANDF and Chairperson of the Castle Control Board presented the annual performance plan for the 2013/14 financial year to the Committee (see attached document).

In accordance with the Castle Management Act, the strategic objectives were the preservation of the military and cultural heritage of the Castle of Good Hope; the optimisation of the tourism potential of the Castle and the optimisation of accessibility to the Castle by the public.  The Castle was protected as a heritage site in accordance with the National Heritage Resources Act.  Additional objectives included the promotion of the Castle as a place of education and learning; the development of the capacity of the Castle to promote nation building and the management of the Castle as a Defence Endowment Property.  Critical strategic issues incorporated in the management plan included financial sustainability and sound financial management; facility management and maintenance of the Castle; asset management reforms; compliance to legislative requirements; the adoption of sound acquisition and procurement principles; human resource development and the enhancement of educational programmes.  The CCB collaborated with the Department of Defence and Military Veterans (DOD&MV) and other government Departments and institutions and endeavoured to strengthen relationships with stakeholders in order to achieve the strategic objectives.

Performance challenges included the strengthening of the staff complement; the development of research capability; the maintenance of the structure in accordance with a Conservation Management Plan; formalising the roles and responsibilities of the various stakeholders through Memoranda of Understanding (MOU’s); adopting the King III principles of corporate governance and presenting the Castle as a heritage site and a premier tourism site.  Governance and oversight objectives included the re-constitution of the CCB; the development and implementation of policy; evaluation and revision of management processes and the review of progress made in the implementation of the strategic plan.  Revenue generated should be utilised for the management of the Castle and sustainability plans included plans to increase income.

Details of the composition of the CCB were provided.  The current operational structure was not adequate and was not aligned to the strategic objectives of the Board.  The Castle Section was under-staffed but an Executive Director was recently appointed.

A breakdown of the audited outcomes for 2009/10 to 2011/12, the revised estimate for 2012/13 and the expenditure estimates for 2013/14 to 2015/16 for each of the four programmes was provided.  The total expenditure for the 2013/14 financial year was estimated at R4.16 million.  A breakdown of the expenditure per item for the same periods was included in the presentation.  The expenditure trends related to the strategic objectives were summarised.

Information was provided on the annual and quarterly targets and performance indicators for each of the four programmes, i.e. Administration and compliance to regulatory framework (programme 1); preservation and presentation of the history of the Castle (programme 2); maximization of the tourism potential of the Castle (programme 3) and increasing the public profile and positive perception of the Castle (programme 4).

Mr S Esau (DA) welcomed the appointment of the Executive Director.  He noted that the financial sustainability of the Castle was dependent on visitor revenue.  However, previous experience had shown that this source of revenue was inconsistent and could fluctuate significantly from year to year.  This aspect of the Castle’s revenue had been identified as one of the risk management issues.  He asked if previous instances of non-compliance with legislation had been dealt with.  The Castle was granted a concession regarding the management of assets.  He asked what progress had been made with the reform of the asset management system.  He asked how the objective to develop the human resource component would be enhanced by the appointment of the Executive Director and how the shortage of staff would be addressed.  He asked how the depreciation amount was calculated.  He asked for information on the payment of R231,000 to consultants.  He noted that the current estimate for the second phase of the repairs and maintenance programme was R37 million.  He asked if the programme was on target.  The decrease in the budget for repairs and maintenance was of concern.  He asked what progress had been made with the establishment of the repairs and maintenance unit within the South African National Defence Force (SANDF).

Ms N Mabedla (ANC) asked for information on the educational programme developed in accordance with the Western Cape curriculum.  She asked if the provincial curriculum differed from the national curriculum.  She noted that 24,000 scholars had visited the Castle during 2012/13 and wanted to know what percentage was from schools in the Western Cape.  The briefing did not include an organogram that would have provided the Committee with information on what positions were currently vacant.

Ms P Daniels (ANC) was critical of the education policies of the Western Cape Provincial Government.  She said that the Castle was a national asset.  She asked for more information on how stakeholders added value.  She also wanted to know what the current organisational structure was.  She asked when the current term of office of the Board expired.  She asked how the salary of the Executive Director would be funded.

Ms H Mgabadeli (ANC) wanted more information on the plans to develop the human resource capacity of the Castle.  She would like to see a programme that went beyond tourism.  The Castle appeared to have little exposure on national television.  She felt that more effort needed to be made to reach out to people rather than expecting people to come to the Castle.

Lt Gen Nkonyane replied that the objective to develop the human resource capacity of the Castle had arisen out of the strategic planning session that was held.  The objective provided the direction which would be followed but had not yet been implemented.  Prior to the appointment of the Executive Director, it was the responsibility of the CCB to ensure that monitoring and evaluation took place and that there was compliance with legal requirements.  These operational responsibilities would be taken over by the Executive Director, allowing the Board to focus on strategic matters.  He pointed out that members of the Board served on a part-time basis.  The Castle had the potential to play a larger role in nation-building and more information would be provided in subsequent briefings to the Committee.  The Board was appointed for a period of two years.  The Minister had renewed his appointment as Chairperson of the Board.  Army Support Base Western Cape was represented on the Board and would step in if the CCB was dissolved for any reason.  Overall responsibility for legal compliance and the preservation of the Castle as a heritage site rested with the CCB.  He pointed out that the Committee had requested that MOU’s were signed with the various stakeholders represented on the Board.  The Minister of Defence was the executive authority responsible for the Castle and reported to Parliament.  The Minister was represented on the Board.  It was necessary to clarify the responsibilities of the other entities represented on the Board.  Other stakeholders not represented included the Minister of Arts and Culture.  The Board was currently engaged in assessing what changes needed to be made to the composition of the Board.

Maintenance of the Castle was one of the risk management factors identified.  Maintenance of the Castle was also the responsibility of the DOD&MV and the Department of Public Works.  The provision for maintenance expenditure was not utilised during the previous two years and was added to the surplus declared.  The Castle had managed to fund the appointment of a temporary Executive Director during 2011 and would continue to cover the cost of a permanent incumbent in future.  One of the performance indicators of the Executive Director was revenue generation.  If additional personnel were required, he would need to find the necessary funds to pay them.  The Castle had an educational programme that was aligned with the Western Cape curriculum because of its location in Cape Town and the need to accommodate school terms.  The extension of the programme to schools in other provinces was currently under consideration.  New methods to market the Castle were being investigated, for example making use of social media platforms at little or no cost.  The plan was to increase the Castle’s contribution to nation-building.

As the Chief of Logistics of the SANDF, Lt Gen Nkonyane was also responsible for the maintenance of SANDF assets, including the Castle.  Certain legislative restrictions were applicable.  The Castle had to make funding for maintenance expenditure available, which was the responsibility of the DOD&MV.  The maintenance programme of the Castle had been prioritised and funding had been made available.  The maintenance of the Castle should not be regarded as being at risk.  The maintenance unit of the SANDF had been established and was fully functional.  The Department of Public Works continued to be involved in certain projects but all responsibility for the maintenance of Defence Force installations would eventually be taken over by the SANDF.

The expenditure for consultants was for fees related to the recruitment of the Executive Director and for the services of an internal auditor.  Internal management controls had been a problem area in previous years but would be addressed by the newly appointed Executive Director.

Mr Calvin Gilfillan, Executive Director, Castle Control Board advised that he had studied the management reports and had identified the issues requiring the most urgent attention.  These issues included supply chain management, oversight and housekeeping.  An action plan would be presented at the following Board meeting.  He brought wide-ranging experience to the management of the Castle and was knowledgeable in alternative ways to ‘take the Castle to the people’.  The South African Broadcasting Corporation (SABC) had recently recorded a programme that was intended to dispel the myths about the Castle.  His personal experience extended well beyond tourism and he planned to explore new marketing platforms and broaden the revenue base.  The Castle needed to be financially sustainable.  The mandate, strategic plans and funding were in place.  The organisation to implement the plans needed to be established but he gave the assurance that the organisational structure would be ‘lean and mean’.  More information would be provided at the following meeting with the Committee.

Ms Mgabadeli asked for the CCB contribution to the MTSF outcome 1 (improved quality basic education) to be reviewed as it created a misleading impression that the educational programmes presented at the Castle was aligned to the Western Cape school curriculum only.

Briefing by the Armaments Corporation of South Africa Soc Ltd (ARMSCOR)
Mr Sipho Mkwanazi, Acting Chief Executive Officer, ARMSCOR presented the briefing to the Committee (see attached document).

The presentation included an overview of the mandate and functions of ARMSCOR.  The strategy was based on the mandate to strengthen State and private production capacity; to strengthen the national research capacity and the diversification and commercialisation of defence intellectual property and technologies.  Other strategic initiatives included a revised financing model to address the challenges of insufficient funding; the renewal of application systems and improved alignment and integration of IT systems; improving the human resource capacity, skills development and skills retention programmes and improving the marketing efforts to reposition the ARMSCOR brand to address poor perceptions of the organisation.

The corporate strategy was based on four themes, i.e. funding and growth, people and capabilities, organisational effectiveness and efficiencies and stakeholder relationships.  Details were provided of the targets that were set for each objective for the current year (2012/13) and the subsequent three years (2013/14 to 2015/16).  The objectives related to the financing of ARMSCOR; the exploitation of commercial opportunities; the establishment of a market intelligence database; transformation of the organisation; reducing staff turnover; organisational culture; skills development; the organisational structure; organisational effectiveness; infrastructure renewal; stakeholder engagement and local industry support.  The key performance indicators for the objectives concerning capital defence matériel and technology acquisition; strategic defence acquisition; system support acquisition and procurement; management of Defence Industrial Participation (DIP) credits; management of the requirements of the DOD&MV and management of the dockyard at Simonstown.

Mr Gerhard Grobler, Chief Financial Officer, ARMSCOR presented the briefing on the financial performance of ARMSCOR as at 31 March 2013 (provisional).  Total assets amounted to R3 038.4 million.  Total estimated income for 2012/13 was R1 030.6 million (budget: R1 333.2 million).  Total estimated operating expenditure was R931.3 million (budget: R1 090.4 million).  The estimated net surplus was R75.5 million (budget: R195.7 million).

Ms Daniels expected to see the actual financial performance in the 2012/13 annual report.  She noted that ARMSCOR had not yet appointed a permanent Chief Executive Officer.  The Auditor-General had expressed concern over the IT systems, which was a long-standing problem.  She stressed the necessity of implementing an integrated system as soon as possible.  She asked for more information on the cash flow generated from operations.  She noted that the value of DIP credits granted to overseas suppliers was expected to decrease substantially over the following three years.  She asked what the assumptions were that informed the estimated amounts.  She asked if ARMSCOR had compiled an asset register.

Mr D Maynier (DA) was amused to note that ARMSCOR had produced a “female court shoe” after conducting lengthy research at considerable expense.  He asked the ARMSCOR Board to explain the delay in the appointment of the CEO.  He understood that someone had been identified to fill the position.  The 2012 report by the DOD&MV on Project “Assegai” (the development of an infrared air-to-air missile) had mentioned delays and major cost implications of unsuccessful test firings.  He asked what the total budget for the project was, what the cost impact was of the failures and what corrective action had been taken.  He asked what progress had been made in the “Hoefyster” and “Vistula” projects.  He understood that ARMSCOR was involved in the acquisition of CIP aircraft for the DOD&MV.  He wanted to know what the budget was for the VIP aircraft.

Ms Mabedla asked for more information on the risk management and fraud prevention mechanisms in place.  The Board had identified twelve major risk factors.  She wanted to know what mitigating measures were in place, particularly with regard to the sensitivity of information and compliance with health and safety legislation.  She asked what the impact was of the loss of skilled personnel and of AIDS on the organisation.

Mr M Booi (ANC) asked for more information on the strategy to achieve gender equality targets.  He noted that ARMSCOR planned to focus on the African market.  He said that there were many failed states in Africa and he wanted to know what ARMSCOR’s approach was to these countries.  He asked what the cost and benefits were of the surveys commissioned by ARMSCOR.

Mr Esau observed that the SA Navy was of the opinion that the dockyard was under-staffed.  Fewer than 250,000 of the required 900,000 hours had been worked.  The dockyard appeared to be unable to meet its mandate.  The Chief of the SA Navy had stated that the dockyard was in crisis and should be the responsibility of the SA Navy.  He referred to the “fiasco” regarding the frigates, the vessels that remained in dock and under-utilised and the other problems related to the dockyard.  He asked if sufficient funding had been allocated and if the challenges facing the dockyard had been identified and prioritised and were in the process of being addressed.

Mr Esau asked if the third edition of the Defence Review was taken into consideration by ARMSCOR and what the relationship was with DENEL and the SANDF.  He asked how the environmental analysis was being dealt with and what steps were taken to address the results of the analysis of strengths, weaknesses, opportunities and threats (SWOT) that was undertaken.  He asked for more information on the revised funding model for ARMSCOR.  He asked if it would be necessary to amend any legislation to allow ARMSCOR to extend its mandate beyond its current activities.  He asked if all parties had signed the shareholder’s compact.  He asked what the critical success factors were.  He asked for more information on the financial performance of the entity as compared to previous years.

Ms Mgabadeli asked if the allegations that ARMSCOR had supplied old and obsolete equipment to the SANDF were true.  In her opinion, the poor perception of ARMSCOR and it problems with the retention of personnel were related.  Staff that was adequately developed could be expected to be more positive towards the organisation.  She had been impressed by the initiatives that were observed during oversight visits but would like to see that more was done about the involvement at school level to provide opportunities for the development of a future skilled workforce.

Mr Maziya was surprised to hear that ARMSCOR was experiencing difficulty in appointing personnel, despite the high rates of unemployment in the country.  The process to appoint a new CEO had taken a long time and he expected that the filling of vacancies at the lower levels would be lengthy as well.  The Committee was concerned over the complaints regarding aging equipment that were voiced during oversight to SANDF bases.

Mr E Mlambo (ANC) referred to the lapses in security the Committee had observed during its oversight visit to the ARMSCOR head office in Pretoria.  He asked if the Board was aware that the building was classified as a national key point.  Sensitive information was kept in the ARMSCOR building and it should not be guarded by a private security firm.

Ms Refiloe Mokoena, Deputy Chairperson, ARMSCOR Board conceded that the process to appoint the new CEO had taken too long.  The Board had concluded interviews with the short-listed candidates and had sent its recommendations to the Minister.  She undertook to follow up the matter with the Office of the Minister.

Mr Mkwanazi advised that a plan to implement the strategy for the development and implementation of an integrated IT system over a period of three years had been developed.  ARMSCOR had considered the issues related to the storage of information, completed an analysis of the system requirements and completed the costing of the system.  The process was in progress.

Mr Grobler explained that the cash generated from operations had increased significantly as a result of changes in the nature of operating revenue.  The income received included deferred revenue from the dockyard.

Mr Mkwanazi explained that the estimated DIP credits over the three-year period were based on the current plans.  The estimated amounts needed to be reviewed on an annual basis.  He confirmed that an asset register had been compiled.  Ergonomics was a major research and development project which included the measurement of the physique of soldiers.  The research was undertaken in order to determine what uniform items was required that would allow a soldier to function effectively.  The increase in the number of female Defence Force personnel had required the design and development of clothing and footwear for women.  The project had also developed special shoes for pilots.  The costs involved in the project could be made available if required.  He had not prepared for questions on the capital acquisition programmes and was unable to provide detailed information.  “Assegai” was a developmental programme with built-in risk factors related to testing and the evaluation of test results.  Failures during testing were analysed so that improvements could be made.  The item was re-tested after changes were made.  Project “Hoefyster” was a developmental programme for an infantry vehicle.  The developmental phase was completed and the project was currently in the manufacturing phase.  Project “Vistula” concerned the development of support vehicles but he was unable to provide more information on what progress had been made.  ARMSCOR had not received the requirements for the acquisition of VIP aircraft from the DOD&MV.

Mr Mkwanazi advised that ARMSCOR had a risk management plan in place to mitigate the risk factors.  A risk and audit committee had been appointed and reported to the Board.  The major risk factors included the leaking of sensitive information, inadequate system security, inadequate management processes and systems and high-risk processes and practices.  ARMSCOR had identified the areas where health and safety measures were inadequate.  One health and safety issue at the dockyard had been dealt with.  A unit to deal with health and safety matters had been established and was required to submit quarterly reports.  Action was taken to address all areas where there had been a failure to comply with legislative requirements.  A Corporate Compliance department was established to ensure ongoing compliance.  A study was undertaken on the impact of AIDS on the organisation.  The outcome was that AIDS was not a major risk factor but ARMSCOR continued with the AIDS awareness programme for its staff.  Retention of skilled, black personnel was problematic.  The reasons for the loss of highly qualified personnel were analysed.  The main reasons were higher salaries offered by the private sector and the lack of opportunity for further development and growth at ARMSCOR.  The organisation was attempting to address these areas.  The recruitment of female staff remained an ongoing challenge.

Mr Mkwanazi said that ARMSCOR was aware of the need for more market analyses, particularly in the African market.  The starting point was the SADC region.  It was necessary to ascertain what capacity was required.  A number of projects in Namibia and Botswana were worth exploring further.  ARMSCOR had undertaken a cost/benefit analysis and a study into the level of customer satisfaction of stakeholders.  The outcome of the study would identify customer needs and requirements.  ARMSCOR had completed an analysis of the requirements of the dockyard with the SA Navy.  It was necessary for both entities to increase capacity.  The Simonstown dockyard was older than 100 years.  The infrastructure needed to be adequate for its purpose.  It was necessary to re-capitalise and modernise the dockyard in order to meet current and future requirements.  The dockyard was transferred to ARMSCOR because it had the necessary capability to manage it effectively.  He confirmed that the Shareholder’s Compact had been signed.

Mr Themba Goduka, General Manager: Simonstown Dockyard advised that 10% of man hours were devoted to management, not the 25% of man hours reported in the media.

Mr Grobler explained that the service level agreement specified the fees that would be charged.  Service fees were calculated according to the amount of work that would be done by ARMSCOR.  The budget reflected the cuts imposed by the National Treasury.

Mr Mkwanazi listed the implementation of the strategic plan and budget; the management of ARMSCOR as a viable business entity; the availability of adequate human and IT resources; the exploitation of regional opportunities and the building of strategic partnerships (particularly with Russia, India and the BRICS partners) as the critical success factors for ARMSCOR.  Government support (through the Minister and the Cabinet) was important.

Mr A Mlangeni (ANC) thanked the presenters for the briefings and the information provided to the Committee.  The interaction with ARMSCOR and the CBB was useful.

The meeting was adjourned.



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