Armscor Annual Report and Equal Opportunities Board: briefings

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Defence and Military Veterans

30 August 2005
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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report


30 August 2005

Professor K Asmal (ANC)

Documents handed out:
Armscor Annual Report: 2004-2005
Armscor Bee Practice PowerPoint presentation
Department Affirmative Action and Equal Opportunities Monitoring and Advisory Board Annual Report: 2003-2005
Constitution of the Department of Defence
The DOD EO/AA Monitoring and Advisory Board Annual Report: 2003-2005 presentation

The Armaments Corporation of South Africa (Armscor) was asked to present its corporate plan to the Committee. However, due to time constraints, Armscor apologised for not being able to deal with all the issues covered in the Annual Report, so they instead focussed on employment equity, affirmative action, and black economic empowerment (BEE). Armscor’s black economic empowerment (BEE) programme had been allocated R250 million of the acquisition budget.

The Committee was concerned about the relationship between Armscor’s property development plan to generate additional income, and Cabinet’s review of Armscor’s role in the defence industry. Members interrogated Armscor’s facilitation of early payment cycles to BEE companies as part of its BEE support programme. The Minister had decided that Armscor would be classified as a Schedule 3(b) rather than a Schedule 2 company under the Public Finance Management Act (PFMA) as Armscor was increasingly becoming a non-profit organisation.

The Defence Department’s Affirmative Action and Equal Opportunities Board then briefed the Committee on its function as an advisory structure for the Minister. It monitored the implementation of policy processes on affirmative action and employment equity.

Professor G Cawthra finally briefed the Committee on a workshop to be held for Members on 9-10 September at the University of Witwatersrand’s Centre for Defence and Security Management.


Armaments Corporation of SA Annual Report briefing
The Chairperson suggested that the Armaments Corporation of South Africa (Armscor) presentation should focus on ‘key performance indicators’ in the corporate plan adopted by the Armscor board, and also list specific ‘deliverables’ related to the corporate plan.

Mr P Molefe (Armscor Chairperson) said that, due to time constraints, Armscor’s presentation could not deal with all the issues covered in the Annual Report, but would focus on employment equity, affirmative action, and black economic empowerment (BEE).

Mr S Thomo (Armscor Chief Executive Officer) added that Armscor’s progress towards achieving its objectives for the previous financial year was charted in the Annual Report. Armscor was ‘benchmarking’ its acquisition process (the process by which it acquired military hardware), and was spending R250 million of its acquisition budget on BEE as the broad-based black economic empowerment (B-BBEE) Act had lifted the restrictions on Armscor’s spending on BEE. Armscor was also commercialising some of its facilities in order to generate additional income.

Mr Thomo conceded that ‘deliverables’ relating to Armscor’s corporate plan were listed in a document separate from the Annual Report. However, the Annual Report did include details of Armscor’s three-year service-level agreement with the Department. The Chairperson insisted that Armscor should present to the Committee its objectives as represented in its corporate plan, so that the Committee could assess whether Armscor’s performance indicators were demanding enough to facilitate future growth. The corporate plan between Armscor and the Department indicated what the government required of Armscor: what was included in the corporate plan for 2005/2006, and had Armscor met the requirements of the Department?

Mr Thomo apologised for Armscor’s inability to present its corporate plan to the Committee, and said that Armscor’s preparation for the presentation was informed by the previous Committee meeting it attended, where the focus was on Members’ questions.

Mr X Magojo (Armscor General Manager: Human Resources) briefed the Committee on transformation and Human Resources (HR) development at Armscor. The comparatively low turnover of staff at Armscor and the technical nature of the work limited Armscor’s ability to advance transformation. However, the profiles of appointees in 2004/2005 according to race and gender showed that 89.8% were black people (meeting the target of 80% black employees) and 67.3 % were women (meeting the target of 40% women employees).

Within Armscor’s job grading system, the supervisory and technical skills (STS) level was an important marker for transformation. Of the graduates and scientists appointed by Armscor to work at this level or above, 76% were black people. Armscor was also carefully monitoring the race and gender profiles for its talent development programme and its bursary scheme, which it was presently unable to expand, due to financial constraints.

Ms M Sindane-Bloem (Armscor Acting General Manager: Corporate Affairs) briefed the Committee on Armscor’s approach to BEE, which was allocated R250 million of Armscor’s acquisition budget. While BEE’s exclusive focus on equity had created problems, broad-based black economic empowerment (B-BBEE) addressed the issues of equity, management, and skills development in black empowered enterprises (companies with at least 50.1% ownership by black people).

Armscor had the opportunity to offer tenders to black-empowered companies through both its special defence account and its operational budget. The special defence account provided for the acquisition of capital equipment for the Department, for which contracts exceeding R1 million were given to black empowered enterprises. Armscor had set a target of 10% for the current financial year for sub-contracting to BEE companies, and was committed to verifying companies’ BEE claims in their submissions for tenders in order to avoid ‘BEE fronting’.

Armscor conducted BEE support programmes that included convening pre-tender conferences to help BEE companies to identify tender companies. Armscor also facilitated early payment cycles for BEE companies to help alleviate cash-flow problems they may have.

Mr V Ndlovu (IFP) enquired what the total number of Armscor employees was, and why Armscor was facilitating an early payment cycle for BEE companies. Mr Thomo replied that ARMSCOR had 1000 employees (including those employed in its research bodies). Ms Sindane-Bloem added that many BEE companies that had recently been launched had cash-flow problems, and Armscor’s early payment cycle aimed to relieve these difficulties.

Mr S Ntuli (ANC) asked what happened to those students employed at Armscor through the talent development programme once the programme was completed. He also asked how Armscor exercised quality control over the services rendered by BEE companies, as there was a perception that contracts with BEE companies involved considerable risks.

Mr Thomo answered that university students involved in Armscor’s talent development programme were given two-year contracts in the fields of finance and technical science, after which Armscor would assess them to decide whether it would employ them permanently. Ms Sindane-Bloem added that the management of BEE contracts was a risk management process, and Armscor’s suppliers were listed on a database for quality assessment.

Mr M Sayedali-Shah (DA) asked whether the alliance of companies that made an offer for the new generation infantry combat vehicle (referred to in Armscor’s Annual Report) was an alliance of local or international companies. He also enquired whether the 11-year period stipulated in Armscor’s contract with British Aerospace (BAE) Systems for strategic defence packages was an extension of the contract period or part of the original agreement.

Mr Thomo responded that the alliance of companies that made an offer for the new generation infantry combat vehicle was headed by Denel and comprised three components, one of which (BAE systems) was owned by an overseas company. The Department had tested and approved a prototype of the vehicle. The 11-year period of Armscor’s contract with BAE Systems was set down in the original contract.

Mr O Monareng (ANC) noted that relatively few BEE companies had contracts with Armscor, and asked whether Armscor was attempting to attract BEE companies. What mechanism did Armscor have to detect BEE fronting in the tendering process? Ms Sindane-Bloem replied that Armscor’s special defence account only allowed it to offer contract opportunities to those BEE companies that made applications. Armscor detected BEE fronting by conducting audits on those companies that registered on its database to check the status of their shareholders.

Dr G Koornhof (ANC) enquired about the status of a forensic investigation by First Consulting (on behalf of the Department) into the suspension of four Armscor officials. Mr Molefe replied that the Department established a commission of inquiry through First Consulting into allegations that the officials had donated a Ratel infantry combat vehicle to the King of Jordan for exhibition without informing the Armscor board, and that the export license for the Ratel vehicle was not renewed. The four officials were suspended during the inquiry. When the Armscor board reviewed the report of First Consulting, it found that the evidence supporting the report was insufficient, and following an internal inquiry, the officials were reinstated.

Dr Koornhof observed that Armscor planned to allow a property development company to develop some of its land, which it would then lease from the developer for a period of twenty years; after this period the land would revert to Armscor. He asked whether Armscor would be burdened by the development after the twenty year period. The Chairperson noted that the Cabinet had called for a review of the defence industry, and queried whether the property development plan should be suspended until the review was completed.

Mr Thomo responded that the reason for the property development plan was that if Armscor did nothing to supplement the income it generated through its technical expertise, it would have to close down within three years, as ‘the business was eroding’. Mr P Hoffmann (Armscor General Manager: Finance) added that Armscor was currently holding discussions with the National Treasury on the property development plan. Although the details had not yet been finalised, Armscor anticipated that the developer would take all the risk for financing the project and would also be responsible for finding tenants. Armscor would receive a negotiated cash-flow stream for 12-15 years.

Dr Koornhof pledged the Committee’s support for the property development plan. However; this was retracted by the Chairperson, who said that the Committee would wait for Cabinet’s resolution on procurement as part of the review of the defence industry. Mr Thomo commented that the Minister and the Minister of Public Enterprises had postponed a number of meetings with Armscor, and consequently, Armscor was not aware of a major review of its role within the defence industry. The National Treasury had not indicated that Armscor should suspend its property development plan.

Mr Sayedali-Shah suggested that the BEE companies for which Armscor facilitated early payment cycles would not be able to deliver services to Armscor if they did not have enough running capital for 30 days. Ms Sindane-Bloem replied that Armscor rigorously checked the financial status and security status of BEE companies that supplied it with capital equipment. Early payment cycles were not determined by these companies’ incompetence, but helped to facilitate cash-flow in new BEE companies.

Mr Diale (ANC) enquired how many applications for contracts Armscor had received in the current financial year. Mr Thomo answered that, on average, 1500 tenders were administered per year, although this figure could rise to 3000.

The Chairperson noted that the Minister had decided that Armscor would change from a ‘schedule 2’ to a ‘schedule 3(b)’ national business enterprise when the Public Finance Management Act (PFMA) changed, and enquired what the difference was between a schedule 2 and schedule 3(b) national business enterprise. He also asked whether the Department attached any conditions to its transfer payment of R350 million to Armscor and whether these conditions were met.

Mr Thomo explained that schedule 2 denoted major public entities that were self-sustaining, while schedule 3 denoted public entities that were dependant on government grants. Although Armscor was currently classified as an autonomous schedule 2 company under the PFMA, it was rapidly becoming a non-profit organisation. Therefore, the Minister had decided that Armscor would be classified as a schedule 3(b) company, as it was located outside the Department and would receive partial funding from the government. The Department’s conditions on its transfer payment to Armscor were too stringent, as the amount of money received did not correspond to the services required. Armscor should have a new service level agreement with the Department.

Professor Cawthra’s workshop briefing
Professor G Cawthra (University of the Witwatersrand) introduced the work of the Centre for Defence and Security Management at the University of the Witwatersrand, which aimed to enhance democratic security in Southern Africa. The centre was running workshops for South African Development Community (SADC) Parliamentary Forum. On 15-16 April, a workshop had been held for Members on the subject of oversight and the review of the defence industry. Another workshop would be held on 9-10 September on issues relating to security in Southern Africa and the instruments used by the SADC and the African Union (AU). The Chairperson committed to sending ten Members to the workshop.

Department Affirmative Action and Equal Opportunities Board briefing
Advocate T Madonsela (Affirmative Action and Equal Opportunities boardmember) briefed the Committee on the Department’s Affirmative Action and Equal Opportunities Board, which was established to advise the Minister and to monitor the implementation of policy processes on affirmative action and equal opportunities. The board carried out its function through meetings with the Equal Opportunities Chief Directorate (EOCD) on the state of employment equity, and accountability briefings by Department services; and it was itself accountable to the Secretary for Defence.

The Affirmative Action and Equal Opportunities Board’s most important programmes included dialogue with South African National Defence Force (SANDF) chiefs on the implementation of affirmative action policy, and the establishment of a Department hotline on domestic violence and sexual harassment. The board was also monitoring the Department’s compliance with the Equity Act by measuring its appointment processes against the national equity targets of 75% black employees and 30% women employees.

The Department was failing to achieve the national equity targets (especially for women and disabled persons); however, the board was taking into account the particular constraints of the SANDF in this regard. The board recommended that the Department correct the racial imbalance that existed at middle management level, as well as align its human resources and fast tracking policies. The performance agreements of Department division chiefs should include an equity clause.

Mr Sayedali-Shah asked whether the board’s effectiveness was being undermined by a lack of resources and whether the board was receiving the support of the Secretary for Defence and the Chief of the SANDF. He also enquired what role the board played in peace-keeping. Advocate Madonsela replied that the board did not have a fixed budget linked to the budget of the EOCD; rather, the board’s budget was determined by its activities. The Secretary for Defence was responsible for the establishment of the board and continued to support it, but many of the chiefs demonstrated a lack of enthusiasm for matters pertaining to equity. The board was an advisory structure, and was involved in peace-keeping by ‘interfacing with peace processes’.

Dr Koornhof observed that the board was interfacing with the Civic Education Evaluation and Advisory Board (CEEAB), a body instituted by the former Minister, Mr J Modise. What was the timeframe for the interfacing process? Dr M Ledwaba (Affirmative Action and Equal Opportunities Board) responded that the interfacing between the two boards resulted from a report by CEEAB to the Minister. Any overlaps between the two boards would be addressed in the Department’s restructuring process.

The Chairperson commented that, as an advisory structure, the board should not look for a fixed budget, but rather should aim to have strong representation in the Department, so that its programmes were promoted.

The meeting was adjourned.


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