Armaments Corporation of South Africa (Armscor) 2015 Strategic plan and funding requirements

Meeting report

Opening Remarks
Armaments Committee of South Africa (Armscor): 2015 Corporate plan and funding requirements
Mr Refloe Mudimu, Chairman, Armscor, outlined the scope of the presentation and said that Armscor would be focusing on the strategic objectives for 2015, since the vision and mission had been presented on many occasions previously.

Mr Sipho Mkwanazi, Acting Chief Executive Officer, Armscor, took the Committee through the strategic objectives, which were aimed at improving accountability on the execution of the mandate, customer satisfaction through service delivery and financial responsibility. They were also aimed at improving efficiency, effectiveness and economical service delivery as well as the utilisation of human resources. These strategic objectives were based on identified challenges, which included insufficient funds to execute the mandate, challenges around skills attraction and retention, operational inefficiencies and ineffectiveness, and the need for local industry support, as well as ensuring the positioning of the Armscor brand in a way that would enhance the organisation.

Mr Mkwanazi briefly defined the strategic objectives of acquisition excellence, the resourcing of the organisation, technology advancement, resourcing of Armscor capabilities, stakeholder engagement and the industry sustainability. The strategic objectives were designed to achieve aspects such as on-time delivery, appropriate solutions for clients, required and adequate professional capability and capacity, required capability from suppliers whenever it was needed. There was also need to have strong relationships with different stakeholders, who were categorised differently, and understand how each stakeholder impacted the organisation so that it would be able to get the necessary support  from the stakeholders so as to achieve its corporate goals.

He said that Armscor seeks to improve on its capital acquisition process so that it is able to deliver on time and to respond as quickly as possible to the requirements of the client. It seeks to improve the contracting process in order to attract smaller companies to participate in the defence industry. It also wants to revise Armscor’s Defence Industrial Participation Policy (DIPP) in order to align it with the best practice. Armscor had looked at other countries and how they did their off-sets in order to learn how best to do its own.

Intellectual Property (IP) was identified as one of the important areas to focus on. Armscor was mandated to be the custodian of IP on behalf of the Department of Defence (DOD), so it was looking at how to protect IP and how it was exploited and commercialised, instead of just using it as military technology in order to realise some income.

Mr Mkwanazi pointed out that resourcing and finance were particular challenges. The DOD allocation from National Treasury overall had been reduced. Armscor was trying to complement the DOD allocations by exploiting other commercial opportunities. It pursued acquisition opportunities for other government departments that are within the security clatter. It looked at exploiting IP in order to realise royalties and to generate income through dual use of technology.
 
Armscor would like to improve Information and Communications Technology (ICT), and also to recapitalise so that it is renewed and improved. It would like to ensure that it recruited capable human resources people (HR), since it currently was aware of the lack of scarce skills and an ageing organisation. It had instituted a succession plan, which ensured that the skills were retained by the people in the organisation. A positive corporate culture would be created within the organisation to ensure that employees were motivated and directed towards achieving the objective goals. The organisation would like to broaden its image not only in South Africa but in the Southern African Development Community (SADC) region as well. It would like to support and sustain the local industry in various ways through different initiatives; increase localisation, create jobs and improve skills.

There were financial, cyber and physical security risks which posed further challenges to Armscor.

Mr Mkwanazi briefly outlined the performance measurements that were agreed upon with the DOD (see attached presentation for full details).

Mr Gerhard Grobler, Chief Financial Officer (CFO), Armscor, gave the financial overview. He stated that Armscor was mainly financed by the DOD through transfers which comprised 85.7% of the total. H repeated that since this was not sufficient to sustain the capability required, income was supplemented by income from commercial services rendered (5.2%), investment income (3.6%) and other income (5.5%). The main expenditure was on personnel and related expenditure (80.9%). There was likely to be a negative financial performance for the next three years. The National Treasury reduced funding and it was estimated that Armscor’s cash reserves would be close to depletion by 2018. If nothing was done to deal with this challenge, the organisation would not have enough funding to carry out its mandate.

Discussion
Mr D Maynier (DA) pointed out that a new CEO had been appointed and was due to start work on 1 May 2015. He asked how many candidates were short-listed for the position and what their names were.

Mr Maynier noted that the financial review indicated a funding constraint by the year 2018, and thus he wanted to know what Armscor had done to limit expenditure, especially on travel. He noted that he had requested details from Mr Mkwanazi six months previously, and they had still not yet been mad available to him, which made him suspicious of the contents in the response. For the past six years Armscor and the DOD had not complied with their policy which entailed keeping the Committee abreast of developments in all its fundamental acquisition programmes, and he asked for reasons for this.

Mr M Booi (ANC) interjected that the questions asked by Mr Maynier should rightly be directed to the Ministry and not to Armscor. Armscor’s presentation was a report on its activities and it could not address matters on the appointment of the CEO.

The Chairperson said that Mr Mudimu would answer the questions that he was capable of answering and refer those that need to be referred elsewhere.

Mr D Gamede (ANC) stated that the Committee was not expected to ask the questions that would more appropriately be asked of the Minister, and expect a response from Armscor officials; that would not be fair because the questions were overlapping. It was the duty of the Committee to request the acquisition report from the DOD, and therefore Mr Maynier should request the Committee to do so.

Mr Maynier said Mr Mudimu was capable of answering the questions he asked.

The Chairperson reiterated that Mr Mudimu should only answer those questions that were within his function, and would tell the Committee which of them he could not answer.

Mr S Esau (DA) asked for clarity on some figures, noting that there were contradictions between the figures presented and those in the Corporate Plan. He asked what happened to the strategy aimed at making improvements on the Dockyard in order to make it more profitable, since there was no mention of it in the presentation. Armscor was capable of balancing the books, because last year there was a serious deficit and it had managed to do so, and he was confident that it could repeat this again. It was of concern, however, that there were clear indicators that there would be a deficit.

Mr Esau asked whether, when the DOD reviewed the acquisition entity, Armscor was likely to meet the requirements. If not, he questioned if Armscor was the right body to deal with this. If there were such serious challenges in the whole acquisition process and in meeting the requirements in delivery of whatever was needed by the DOD, Armscor would therefore fail in its mandate. He wondered how this was being addressed, when the books were being balanced at the expense of posts being filled. Mr Esau was worried that there was a lack of coordination between Armscor and the DOD and this would result in poor performance. The report showed changes in certain strategies so as to meet the requirements of the DOD, and this meant more resources were needed. He asked how this was going to be dealt with effectively within the short term?

Mr Esau pointed out that Armscor used to consider itself as an international player, and in terms of the new projections it was considering itself a regional player and to some extent a continental player. He wondered why those changes had been made. He asked what IP Armscor possessed and whether it was considered part of intangible assets? He enquired how the books were calculated and projected, since in some instances there was a big difference between what was projected and what was achieved.

Mr Esau also asked what was the particular challenge around Alkantpan, and what measures had been put in place to deal with issues of security. He asked for an indication of the current situation.

Mr Mudimu replied that initially there were 153 applicants for the CEO position and 50 were selected at first stage, then this number was narrowed down to seven and to five. Those five were interviewed and assessed by an outside agency. He stated that if information on the CEO’s travel expenses had been requested beforehand, they would have been able to provide it and he would make a follow up on why it was not available to the committee.

Mr Grobler responded that the there were differences in figures because the figures mentioned in the Corporate Plan were stated as at December 2014 and the document being referred to in the presentation was for the full financial year. The CEO’s travel cost was 2.8% of the expenditure of Armscor. There was a process and approval at a high level required for those expenses and they were managed accordingly. There was still a huge task ahead as to how the organisation would fund the IP system, following a process that was already in place.

Mr Gamede asked what the other income of 5.5% was, because others were explicit but that figure was not.

Mr Grobler answered that it was income obtained through the portion of the building that was rented out to the DOD, through security services and recovery of costs from the DOD.

Mr Mkwanazi replied that despite financial limitations Armscor ensured that all the critical positions were filled. The organisation was addressing the gaps with the DOD and it needed to change the processes in order to align itself with the requirements of the Defence Review; for example, respond quickly to those requirements that were urgent. There were a number of projects that the organisation was working on, in order to ensure that it was in a position to meet the requirements of the client, such as the Succession Plan and the fast tracking of the required skills. An analysis of the facilities was done in terms of security and Armscor had budgeted for improving security, especially that of Alkantpan and those that were outside the head office.

Mr Mkwanazi agreed that Armscor had not shown any income generated by the IP, and it had not been receiving royalties on the IP. Armscor would now review the IP policy and it was working on the management of the matters, not only to register the patents, but to evaluate and exploit the IP. Armscor realised its offsets through technology, sales and investments. Projections were set using a set out plan and changes occurred depending on how the industry performed.

Mr Mudimu’s response on the issue of Dockyard was that the Armscor board and management had a strategic meeting last year and came up with the Armscor On-time Strategy, which outlined the radical steps that Armscor would take on issues, including job creation. The pace was being held back by the delay in the approval of the document.

Mr Mudimu added to the earlier comments on the Alkantpan, and explained that there had been discussions at the lower level of management, but these did not filter through to the higher levels of management, and that was the biggest challenge. The shareholder was aware of the challenge and was handling the matter with the ministers concerned. Armscor agreed with the Department of Defence that there should be three meetings annually in order to build common ground and check each other’s performance.

Mr Maynier said that he understood the process of selecting the CEO and that five individuals were short-listed and interviewed. However, he repeated that he wanted to know their names and, if there was a suggestion that they could not be disclosed, what was the reason for that?

Mr Booi asked which Parliamentary Rule was being used to request that information.

The Chairperson pointed out that corporate ethics and parliamentary ethics did not allow the names of the short-listed candidates to be revealed. The Committee could question the selection process but not request the identities of the short-listed candidates. The Board was responsible for recruitment and selection, and that process was followed. The names of the candidates could not be requested in the Committee meeting.

Mr Maynier questioned the transparency of Armscor, and stated that this created public distrust in Armscor.

Mr Booi responded that it was misleading to say Armscor was not transparent when the management  always attended Committee meetings and accounted for their activities.

The Chairperson suggested that in future, when there was a presentation and Committee Members felt that there was lack of transparency, they should raise the matter in that meeting and not later.

Mr Maynier clarified that he was not suggesting that Armscor did not appear before Parliament but that when it came to core business of acquisition, both Armscor and the DOD were not transparent enough. He said that if he were to request the total budget and schedule slip of a certain project, he would not get an answer. This was of great concern.

The Chairperson stated that the suggestion of a lack of transparency should not be imputed to anybody in this meeting. It should have been raised at the time of the presentation.

Mr Maynier made reference to requisition programmes which included requisition of medium and light transport aircraft, not only airlift but also VIP aircraft for the President and his Cabinet. He asked for the status of that project and the total budget.

Mr Esau referred to the environmental scan which showed that the global defence industry was shrinking, and noted that consolidation was the key trend in the industry. Clearly, internationally, the defence industry was expanding rapidly due to wars and fights on different continents and the major powers that were pushing arms into these places of conflict. He asked therefore what other factors may have been taken into account in the environmental scan in order to come to the conclusions that contradicted what was evident elsewhere?

Mr Esau said that logistics support had been revised and reduced, yet it was extremely important in such a technical industry, so he wanted to know how the reduction would impact on the performance of Armscor?

Mr Esau questioned whether Armscor had truly applied its mind to all the possibilities of the funding model?

Mr Esau noted that Armscor had been involved in peace missions and wondered if it had tried to sell weapons or equipment and other items to the armies in other countries. He asked that Armscor must give clarity on how the relationship with South African Police Services (SAPS) and Department of Correctional Services (DCS) was going to be exploited, and how that would boost the funding model of Armscor itself. The organisation had improved and increased its targets in a financially constrained environment, and he applauded it for that.

Mr Mudimu replied that Armscor was an agent of the DOD and it only made purchases following requests. In order to promote transparency the new board agreed to promote relations between Armscor and the industry. There had not been any requests from the DOD for the purchase of aircraft.

The Chairperson made the point that Members were allowed to ask any question, but if the question was not answered to their satisfaction that did not necessarily mean that was lack of transparency or any lie on the part of the respondent. He asked for confirmation that Armscor does not buy aeroplanes.

Mr Mudimu replied that Armscor did buy aeroplanes, but only when it had received a request from the client, and the request had not yet been received.

Mr Maynier asked for confirmation that there had been no request, discussion or project from the DOD to procure aircraft.

Mr Gamede replied that there was an acquisition process of ordering small and medium aircraft that was under way and it included VIP aircraft.

Mr Maynier asked that if Armscor was not doing the acquisition, then who was?

Mr Mudimu responded that Armscor was not responsible for the budget for acquiring whatever was needed by the DOD. The budget was re-planned time and again according to priorities and this budget had a limitation. There were a number of requirements that had to be fitted into the budget. Once the priorities were known, Armscor was then engaged to work on that particular project. It acquired what was needed, after deciding whether to buy, upgrade or develop.

The Chairperson asked Mr Maynier to state the precise point of asking the question on the procurement of aircraft, because it was constantly being raised by him.

Mr Maynier replied that the Committee had a constitutional obligation to conduct oversight on the Department. In the previous six years it had been sinking R6 billion a year into capital acquisition, and the Parliament had no idea how the money was being spent.

Mr Booi encouraged members to be aware of the processes of acquisition.

Mr Esau said that there had been some changes between the previous Strength Weaknesses Opportunities and Threats (SWOT) analysis and the current one, and requested a brief explanation why Armscor now saw itself as a regional and continental player, and not an international one, in the broader arena. In terms of the weaknesses, he asked whether the matter on reporting at high management levels had been dealt with, since that was no longer stated as a weakness?

Mr Mudimu replied that the question on shrinking industries was based on the analysis that was done which had looked at the budgets of different countries. A number of companies had acquired other companies and worked at the integration level. The markets were shrinking and difficult to penetrate and despite evident uprisings in the international arena, they did not affect the trends in the analysis. There had not been adequate focus into the regional and continental markets by the industry. The trend had been to focus on the historical markets such as the Far East, but there was now a deliberate focus on the African continent. Even the analysis indicated an upward trend in the African economy and Armscor would take that into consideration. The region and continent were the current priorities, hence the changes in the strategies.

In the Alkantplan the organization looked at what had been achieved and came up with interventions at managerial level in order to deal with the weaknesses.

He explained that the negotiations with SAPS and DCS initially focused on protective clothing and ammunition but had been extended to deal with aircraft maintenance although the Service-Level Agreement (SLA) had not been finalised yet. The targets were increased in order to improve the performance of the organisation.

The meeting was adjourned.