Armscor, Castle Control Board 2018/19 Annual Performance Plan

Meeting report

Armscor’s Corporate Plan

Mr Kevin Wakeford, Chief Executive Officer, Armaments Corporation of South Africa (Armscor), said the aim of presentation was to present a concise corporate overview of Armscor’s corporate plan for 2018 to the Committee, as tabled on 12 March 2018. This was the fourth year that all public entities had tabled in Parliament, which meant full compliance by the Department of Defence (DoD) with the national regulatory framework.

The Presidency had selected the DoD, and Armscor within the Department, as the benchmark for strategic planning for all government departments and public entities. Armscor had been established in 1968, five years after he United Nations had imposed voluntary embargo. Denel had been established in 1992.

Armsco had a process that provided for the complex acquisition of the Department’s requirements for the army, air force, navy, the SA Military Health Service (SAMHS) and special forces. Armscor had the mandate to provide services to other organs of state. It currently offered acquisition, research and development (R&D) and quality assurance services to other countries -- in particular, to Algeria and Namibia. Armscor executed on average R10 billion of acquisitions on behalf of the Department. It had achieved a year-on-year clean audit from its operations, and presented an opportunity for partnership with other organs of state.

Military acquisition was defined as the management and procurement process dealing with a nation’s investment in the technologies, programmes and product support necessary to achieve its national security strategy and support its armed forces. Accordingly, the military acquisition management was a key enabler in service delivery. The same key principles of delivering services within specifications, cost and timescales applied. Armscor managed strategic facilities that offered research and development services in hazardous materials (hazmat), ergonomic technologies (ergotech), protechnik, gerotec, the alkantpan ballistic test range, and the Institute for Maritime Technology (IMT).

Mr Wakeford said that Armscor was developing a new generation Ultrasonic Broken Rail Detector (UBRD) that would even be more cost-effective and efficient. Strong interest had been shown in UBRD by the international rail market. Armscor had completed a test installation in India.

The dockyard delivered an effective and efficient maintenance service to the South African Navy comprising of planned preventive maintenance, corrective maintenance, reconstruction and repairs, and upgrades and modernisation of ships and submarines.

Mr Wakeford said a civil claim had been instituted in the Court of Lisbon against Armscor to the value of €192 million. It was alleged that services had been rendered by Beverly Securities Ltd (the plaintiffs) as agents in establishing a clandestine Portuguese channel during the 1980s for the transportation of 50 Oryx helicopters in kit form. The litigation was proceeding in the normal course, and Armscor was awaiting for a trial date.

On the area of corporate support, Armscor faced challenges. There was an underestimation of the effort of suppliers combined with long lead times in reaching agreements with business, a lack of capacity from suppliers, and financial constraints of suppliers.

Mr Wakeford said that Armscor’s strategic objectives were aimed at improving accountability, customer satisfaction, financial responsibility, efficient, effective and economical service delivery, and effective utilisation of human resources. These objectives were based on identified challenges, including insufficient funds to execute its mandate, skills attraction and retention, operational inefficiencies and ineffectiveness, local industry support for sustainability, and Armscor’s brand positioning. In order to address these challenges, strategic objectives had been devised into targets and goals to be achieved.

The turnaround objectives were organisational transformation, efficient, effective and relevant organisation, and business development and commercialisation. The new Armscor turnaround strategy was based on the slogan: “On time, in time, towards a sustainable future.” The strategy had been divided into two phases. The first phase had to be implemented in the 2016/17 financial year and the second phase in the 2017/18 and 2019/20 financial years.

In order to generate revenue, the Armscor was pursuing revenue generation initiatives including offering its services / products to local government and pursuing collaboration with the African Defence Force, and sweating its land parcels.

Mr Wakeford said that the Defence Review approved by Parliament in June 2017, had expressed particular guidance relating to Armscor’s role in meeting the requirements of the SANDF, as well as implementation actions to be pursued. Armscor was a permanent member of the Defence Review implementing team. On human resources, the transformation goal set was to have 70% black employees, and this goal had been achieved.

The financing of Armscor was mainly through income received via the defence budget, which consisted of transfer payments and payments for services rendered to the Department (73%). As the funding was not sufficient to sustain the capability required, income was supplemented by income from commercial services rendered (14%), investment income (3%) and other income (10%). The main expenditure as a service organisation remained personnel and related expenditure (82.4%). During the last three years, Armscor had had to implement various cost containment measures as cuts were introduced by the National Treasury. For the 2017/18 financial year, total income was R1.5 billion and the profit was R25.5 million.

Mr Wakeford concluded by saying that Armscor’s future environment was threatening its viability. The strategic premise of reducing the defence allocation was a becoming reality. The Armscor vision was in the process of being realised. Its mandate would have to be applied differently than in the past to achieve the desired results. The new strategy engaged this reality, and could be reposition Armscor to emerge as much stronger and nationally a more relevant State Owned Enterprise (SOE).

Discussion

M S Marais (DA) asked what the relevance of Armscor was -- in other words, why the CEO was of the view that the SANDF could not operate effectively without Armscor. There was Denel, so why was Armscor needed? It was time that Armscor went back to basics due to the financial constraints and cut out unnecessary expenses. He reiterated that Armscor should justify its own existence, and asked what the situation at Denel was. At the previous meeting, Armscor had stated that the challenges Denel faced stemmed from the need for Armscor to release guarantees. What was the situation? He asked whether money used on travelling could be used better -- what were the purposes of travelling and what it want to achieve when travelling? He commented that the industry was in a dire need of a dockyard. He was aware of the budget constraints, but equipment was needed in the DRC for the troops deployed there. The troops needed aircraft. What would Armscor advise?

Mr S Esau (DA) said that he had many questions to pose, but because of the time constraints he would put them down in writing and send them to Armscor. He asked it to elaborate on the deficit of R30.6 million at the dockyard. Was this planned for the 2018/19 financial year? On the contracts, were there any interventions to improve on these?

Mr P Mhlongo (EFF) said that he wanted to find out how Armscor could jump-start the defence review process. What could Armscor do to get the Defence Review started, finalised and implemented? What interventions or assistance could be provided by Armscor? There was a need for the acquisition of intellectual rights in order to protect the intellectual defence properties acquired in the past, to ensure that the South African defence force remained top class. South African technology was controlled by foreign companies, and this was very dangerous. Denel and Armscor should be in a position to have control over South African defence and security technology. This should not be dumped in the hands of foreign companies and in doing this, they were failing in their duties.

Armscor’s response

Mr Wakeford responded that Armscor had never been as relevant as it was now. It had been established in order to meet technological and industrial demands. It had been created in response to a military embargo to ensure military industrialisation. Even if one looked at the acquisition process, one would see that this country needed military industrialisation as ever before. A lot of the work done with the Denel had technological development in the context of weapons systems. No one could believe what the Armscor had developed. Armscor had young engineers, including black engineers. There was a need to develop the South African defence sector. Armscor was the only institution to develop economic activities that made sense. South Africa did not need to procure its arms and defence equipment.

Armscor had an intellectual property framework which was used to regulate agreements. That was how Armscor worked with Denel and other industries across the board. However, they had to involve indigenous knowledge.

In 2015, the board of Denel had allowed Denel to turn its performance guarantee into a corporate guarantee in order to have a space on the balance sheet. By December 2016, there was no space on the balance sheet. It had wanted to release another performance guarantee of R100 million. Armscor had said such an amount could be released only if Denel insured it. They had got an insurance package and the money had been released.

With regard to contracts, Armscor was paying sub-contactors directly to save jobs and companies.

In 2018, Armscor had procured for R6.5 billion, which was R10 million in excess of what had been budgeted for, because Denel could not deliver. This had set back Armscor’s own performance.

Castle Control Board (CCB): 2018/19 Annual Performance Plan and Q4 report

Mr Calvyn Gilfellan, Chief Executive Officer: CCB, said the presentation would focus on progress made in addressing strategic risks, marketing the Centre for Memory, Healing and Learning, providing an update on the utilisation of the R4.5 million Castle maintenance programme, safety and security issues around the Castle, and describing progress in terms of management of the entire precinct and the legislative review process.

The CCB had achieved a clean audit. Achieving a clean audit was a continuing performance and was not negotiable. It was based on good governance and good house-keeping, resulting in a smart, well-managed citadel that he could be proud of. The CBC could not look for financial support from the DoD or National Treasury while at the same time continuing to tolerate financial leakage from the CCB precinct. The CCB’s displays and product offerings were so much more than simple targets for visitors and revenue generation. The CCB had many keys to community sensitivities, education, and nation-building, and ought to promote and deliver an important national message. This was a fundamental responsibility.

Mr Gilfellan said that the CCB sought to implement and pursue statutory prescripts, particularly after a constructive engagement with each stakeholder and the Auditor General. There would be an amendment to the Castle Management Act. Risks that needed to be mitigated included preventive maintenance costs, security, its sustainable reputation, its financial sustainability, and the prevention of management fragmentation.

Total expenses in 2017/18 and 2018/19 had been R8.5 million and R7.8 million respectively.

Activities in 2018 had included a military farewell function; a police briefing before the State of the Nation Address; a sacred Khoi ceremony; a prayer service on Easter Monday; a memorial service for the late Winnie Madikizela-Mandela; a treasure hunt at the Castle; the District Six land claims press conference; a May Day Festival on 1 May; and the Ramadaan For All exhibition.

Mr Gilfellan said that the Committee had reviewed and accepted the CCB’s 2018/19 annual performance plan (APP) and budget update, strategic risks and mitigation measures.

Discussion

Mr Esau said that he was concerned with the sustainability of the CCB. He had noticed discrepancies between the figures given in the presentation and the APP with regard to fencing the Castle. The CCB had said that it funded and sustained itself without mentioning what its actual budget was, or whether money was transferred to it. There was no clarity from presentation. Had an agreement been reached with Iziko Museums of South Africa? How many people visited the Castle, and how much revenue was generated from ticket sales? Was access to the Castle monitored?  He appreciated that there had been an improvement in safety and security, but there was a report that there were people who were committing crimes because they were familiar with the Castle, and he urged that these people should be identified and removed. There had been an improvement through the disciplining of those who got drunk at the Castle.

There was a military museum that had been closed at the end of April 2018, and would be absorbed into the CCB. What would happen to that museum, which had been in existence for so long? There was no final answer on this. He also wanted to know about the relationship between the CCB and the Khoisan, because they had been using the Castle regularly. There was a space contestation and there was a group stating that the Castle had been built on its space. Who were that group, and what was the basis of contestation? People were having sex at castle and leaving condoms lying around,  and this undermined the image that they wanted the Castle to reflect.

He said the CCB should have clear strategies and plans so that they could be researched with a view to enhancing its performance capabilities. Had there been any reports of corruption or fraud in respect of security personnel and soldiers deployed there? He would like to see targets in the APP being reported on, whether they had been achieved or not. New targets should be set each and every year and should start with those targets which had not been achieved.

The Chairperson remarked that the questions could not all be responded to, because it was the time for the meeting to be closed.

Mr Esau responded that he would be happy if questions were to be responded to in writing.

CCB’s response

Mr Gilfellan responded that the R4.5 million was part of the infrastructure budget which had been allocated to the CCB by the DoD, but which was not managed or controlled by the CCB. There had been a guideline – attached to the APP report – which categorised different types of maintenance and refurbishments.

On the changing of targets, all targets were dependent on the five-year strategic plan and the Medium Term Expenditure Framework (MTEF).

There had been a process where the Iziko management and CCB’s management had met to discuss some issues. There were issues being challenged before the courts and could not talked about because they were sub judice.

The guards who had become undisciplined while on duty had been charged through the normal processes. If they were found guilty, they were not called upon again.

He added that the military museum was not literally closing -- it was only its trust that was being closed. There were military veterans who were benefiting from the Castle.

The Chairperson said the CCB had to improve on achieving its targets and on the security issues.

The meeting was adjourned.