Minister & Armscor on the future of Project Biro, Hotel and Hoefyster, plans to address combat vehicle requirements for SA Army & status of maintenance of SA Air Force fleet

Meeting report

The Chairperson asked Dr Wilhelm Janse van Rensburg, Committee Researcher, to share some of the preliminary findings of his draft report on Project Biro and Hoefyster. Dr Janse Van Rensburg also provided details on the maintenance issues of the fleet within the Department. 

The Chairperson asked the Armscor team to make their presentation.

Presentation by Armscor

Adv Solomzi Mbada, Chief Executive Officer (CEO), Armscor, made the presentation and said that various engagements between Denel and Armscor revealed the risks of Denel not being able to meet Project Hoefyster contract requirements. Armscor had presented to the Plenary Defence Staff Council (PDSC) on 19 November 2018, at which these risks and possible alternatives had been presented.

Scenario 1 had accepted Denel’s request for extending project delivery to 2026, the waiving of penalties estimated to be about R500m (by the proposed date of 2026), and absorbing of escalation costs by the Department of Defence (DOD), such as inflation and return on equity (ROE).

Scenario 2 had the DOD reducing the project scope in terms of quantities or number of variants.

Scenario 3 sought an alternative contractor to work with Denel or replace Denel.

Scenario 4 had imposed a cut-off target date of May 2019 for the completion of the design phase of the Section Variant (SV) infantry combat turret as an ultimatum, after which they should consider terminating the project.

The recommendations were that Denel was not in a position to complete the remaining work on Phase 1 of the project due to insufficient capability, financial challenges, and the obsolescence of critical sub-systems. The project would be loss-making to Denel.

Funds from the cancelled contract could feasibly be re-channeled for the upgrading of the Ratel Combat Vehicle (RCV) system. These funds would be from the R1.4 billion in bank guarantees and the current year allocation of R1.9 billion.

On the status of maintenance of the South African Air Force fleet by Denel, the Committee heard that the C130 product system support contract had expired on 31 December 2021, and had since been extended until 30 June 2022. Armscor had issued a request for bid, and Denel had requested an extension to allow them to respond to the bid.

The Oryx product system support contract would expire on 31 March 2022 and would be extended until 30 September 2022. Armscor had issued a request for bid, and Denel had requested an extension to allow them to respond to the bid.

The Rooivalk product system support contract would also expire on 31 March 2022 and would be extended until 30 September 2022. Armscor had issued a request for bid, and Denel had requested an extension to allow them to respond to the bid.

The Agusta 109 fleet product system support order had expired on 31 December 2021.  Evaluation of bids received was currently in process by Armscor.

The Boeing Business Jet product system support contract was still valid until 31 March 2023.

(Please see attached presentation for further details).

Discussion

Mr S Marais (DA) said that it had been an overwhelming presentation and maybe more people would now understand the state of the equipment of the Defence Force, and realise the importance of working together to make sure everything was back into place because at the current moment the country was vulnerable to any attacks. He asked if Armscor had funding for the current projects, and on Hoefyster, he wanted to know who was being paid the difference that had been mentioned in the presentation. On the issue of bank guarantees, he asked if the Treasury was providing surety, or if there was a different situation -- he was concerned because he wanted to know the way forward should there be a shortfall in the payments. He also wanted to know who was going to take responsibility for the manufacturing at Denel. He told the Defence Force team that the state of infrastructure was very concerning, and asked whether there were any maintenance contracts, what the memorandum of understanding (MoU) entailed, and why the contracts had not been put into place before their terms came to an end. Could the Committee be told the exact amount of funding required and what the alternatives available were if there was no funding? Could the Committee also be provided with more information on the legal cases that involved the Defence Force?.

Mr T Mmutle (ANC) concurred with the issues raised by Mr Marais. He was concerned about Project Hoefyster and was of the view that Armscor should terminate the contract with Denel because the project had been behind schedule for more than a decade, and even the technology would not be good enough in this day and age. Stakeholders needed to come together and find a solution instead of watching Denel go down the drain without any rescue plans because the demise of Denel meant the demise of the defence industry.

The Chairperson said the presentation showed the current state of affairs at the Defence Force. It was important that the country took care of the defence industry because wars were constantly happening, and this meant that the country must upgrade its equipment constantly. There was a need to invest in Denel. The financial challenges it faced could be noticed in the slow pace of projects and how the fleet was not being maintained as it should be. Underfunding was a serious challenge because it affected the system support structures. The Hoefster project remained a very important project that must be completed because the current fleet was acquired in 1976 and was no longer relevant because it did not have the capabilities to serve the needs of the current world. The Committee was very concerned about the matter of funding because projects had to be completed as a matter of urgency.

Responses

Vice-Admiral Mosiwa Hlongwane, Chief of the Navy, said that Project BIRO had been a success. The vessel was currently in Simonstown, and it would assist in some of the water patrols. He added that there were serious challenges on the navy front, and they needed assistance to fulfill their mandate.

Lt Gen Wiseman Mbambo, Chief of the Air Force, told the Committee that the situation was not ideal on the combat-ready front, and the flying hours remained an issue as they were flying around 5 000 hours, and these were not the required hours. There was a need for new platforms to protect the navy, but the air force did not have the capability at this stage -- most of the equipment was more than 60 years old. The air force got its parts from Denel, so it was very concerned with what was going on with Denel and hoped that a solution was found soon.

Dr Philip Dexter, Chairperson of Armscor, said the board was working hard to deliver, but it could not be taken for granted that funding was the major factor. He suggested that there should be a strategic discussion with the executive and the Committee because there were potential ways to get solutions. Denel could be restructured in the process, and help save the issues from being raised in the meeting.

Minister's comments

Ms Thandi Modise, Minister of Defence, appreciated the presentation and said that there was not much to add because everything had been captured well. She said that in the old days, Parliament had been working together, especially when it came to defence force matters, but the current situation was different because the issues were politicised, which made it difficult to find solutions. There was a need to have a united front to find the solutions. She added that some of the ranks were not taken seriously, because people appointed in those positions did not know about their roles and duties in some cases.

Maintenance of equipment was very important, and there had been a big blunder in turning a blind eye to it because that was when the demise of Denel had started. There was a need to look at the weaknesses of Denel so that solutions could be found, and they had to be implemented. There must be a discussion on the way forward to be taken. She suggested a roundtable discussion before Treasury was approached, and that the Committee would be briefed on the suggested solutions. There were a lot of expectations from the Defence Force, considering their position in the region. There were companies that had shown an interest in acquiring Denel.

The Minister was of the view that there must be sufficient reasons to justify the equipment to be bought for the Defence Force because the ministry did not want to be seen as a war-hungry department just going out to buy equipment for wars. She highlighted the importance of checking the details of all contracts that would be entered into by the Defence Force, especially when it came to service agreements because they did not want to be taken advantage of.

It was not a bad idea to have collaboration with local universities regarding the manufacture of some of the parts, instead of going to buy overseas. The Minister told the Committee how the United  States and other western countries were investing billions into research whilst there was a limit imposed on the amount African countries could invest and said that it was important to have homegrown solutions.

It was important to look at what could be sacrificed at this stage in the budget so that maintenance could be implemented. However, barracks must be fully maintained, and she was concerned about the ordinary soldier -- not the top officials, as they received better benefits. The Minister reminded the Committee that the Treasury would not allocate the full amount requested in one financial year, but that should not deter the maintenance of equipment. It may be a frustrating process, but it was necessary.

The Chairperson reassured the Minister that the Committee supports the funding request for the defence force, and they would do their best to make sure that funding was received. The Chairperson said that Covid-19 had exposed some of the issues around equipment because soldiers were transported in some cars that were not conducive and in one border visit the Committee was not pleased by their findings.

Ms Gladys Kudjoe, Secretary of Defence, said the Minister had explained most of the matters that had been troubling the Defence Force. There used to be a Defence Account that was available for making acquisitions, but it had been cut down and now there was a new system in place. The amounts for the projects were in foreign currency and might change because of the exchange rate changing.

There was still a need for more vessels to assist in the projects.

Ms Kudjoe said that the litigation cases were coming mainly from Greentech because they had invested an amount of R120 million in Denel and wanted to liquidate the entire company so that they could recover their funds. She had not received any new information about the case and would get back to the Committee.

The repairing of vehicles had been difficult, but the Department was trying to see if they could get parts locally, as well as whether they could make these parts and strengthen the Defence Force. She told the Committee that there was no way that Project Hoefyster could be continued because it was almost 16 years old, and the Department was concerned and looking at ways in which they could recover the funds they had injected into the project. They had been looking at the critical components of Denel that could be salvaged, and there had been talk about Denel being moved to the DOD but there were still more discussions to be done because everything had to be analysed. They were aware of the challenges that they would encounter when they requested more funding, but the projects had to be completed, no matter the situation. They could not rely on other countries to supply equipment for the Defence Force, and this had been evident when Denel was at its peak.

Further discussion

The Chairperson said that one question about the bank guarantees was yet to be answered. He added that the matter of pilots' training had not been clarified, and asked if there were any training alternatives available.

Mr Marais asked if a comment could be provided on the legal proceedings involving the Defence Force.

The Committee was told that it was worthwhile to note that if the Department was to call for the bank guarantees, it meant that the bank would automatically request Denel to make reimbursements, and this would result in its liquidation, there were various other projects within Denel, and if one bank guarantee was implemented it meant that Denel was going to be liquidated, so it was important to look at other viable solutions. The bank guarantees referred to in the presentation were not linked to Treasury.

The Chairperson added that he was not sure of how many projects could be saved should a liquidation process start at Denel, and how many creditors would be able to receive their money, because there were steps to be followed when paying creditors.

Adv Mbada said that the bank guarantees had been made by financial institutions, and Treasury was not part of the process. For the bank guarantees, the claims would be against the banks and not Denel. There was only one case against Denel at the moment, and it involved the MoU of a contract. Armscor had been able to challenge some of the disputes raised in the case.

The meeting was adjourned.