ARMSCOR Annual Report briefing

Meeting report

DEFENCE PORTFOLIO COMMITTEE
21 October 2005
ARMSCOR ANNUAL REPORT BRIEFING

Chairperson: Ms T Tobias (ANC)

Documents handed out:
ARMSCOR Annual Report 2004-2005 [available at www.armscor.co.za]
ARMSCOR PowerPoint presentation [please email [email protected]]
ARMSCOR: Objectives and Functions of the Corporation

SUMMARY
The Committee heard a briefing from the Armaments Corporation of South Africa (ARMSCOR). Their report pointed out the role of the organisation, which was to make acquisitions and dispose of arms no longer used by the South African Defence Force. The briefing focused on, amongst other things, the Groups Financial Statements and Black Economic Empowerment policy.

Members concerns included the ineffective communication channels between the Department of Defence and ARMSCOR; the lack of research and development; the shortage of women staff; and the risks involved when AMSCOR invested in property development.

ARMSCOR CEO, Mr H Thomo, warned that the Group would collapse in three years due to diminished reserves. ARMSCOR had been forced to utilise its own money to cover costs of purchases made on behalf of the Department of Defence, when the Department had failed to transfer sufficient funds to the Group.

MINUTES
Members did not appreciate the ARMSCOR delegation’s late arrival for the meeting.

ARMSCOR briefing
Mr H Thomo, CEO, said that ARMSCOR's role was to make acquisitions and dispose of arms no longer used by the South African National Defence Force (SADF). His briefing concentrated on their values, corporate profile, and the CEO's report and the Group’s Annual Financial Statements.

Ms Borotho, General Manager: Corporate Affairs, then briefed the Committee on Black Economic Empowerment (BEE) and human resources development.

Discussion
Ms B Ntuli (ANC) asked for clarification on their research and development. Any company that did not invest in research and development was doomed.

Mr Thomo replied that ARMSCOR did not invest in research and development because there was no money. There was even less money for replacing the old equipment

Ms Ntuli said the Committee would have to discuss with the Department of Defence how to inject more resources into research and development to prevent the corporation’s collapse.

Ms A Van Wyk (ANC) asked the reason that the ARMSCOR had few women in top management positions.

Mr Thomo replied that technically qualified women were very few. In 2004, ARMSCOR had employed one women engineer, and she had always complained that her peers were making more money in other companies. She left within 12 months.

The Chairperson said that South Africa should learn how other countries had dealt with similar problems. The Government has committed itself to 50% women representivity. ARMSCOR should have developed a programme for women’s empowerment.

Mr S Shah wanted to know whether ARMSCOR would fulfil their commitment to the Defence Industrial Participation (DIP). Did ARMSCOR have an internal audit committee, and why did they rely on outside auditors?

Mr M Hofman, ARMSCOR General Manager: Finance, replied that ARMSCOR had been using both internal and external auditors. Reports were submitted to the Minister on a regular basis. The Auditor-General would take over the role of the external auditors from KPMG and Gobodo.

The Chairperson asked what had happened to their ‘going concerns’.

Mr Thomo replied that ARMSCOR bought military equipment on behalf of the Department of Defence, the South African Police Services and the Department of Correctional Services. Sometimes the transfer payments from the Department of Defence were not enough. ARMSCOR was forced to utilise money held in reserves. Other funds were generated by utilising facilities as Gerotek for private sector vehicle testing. Overseas companies such as Porche had been paying to test their vehicles. Singapore also used ARMSCOR facilities to test their guns. He warned that ARMSCOR would collapse in three years time due to diminishing reserves.

Mr Shah asked more about projected income, and whether risk analysis had been done for the proposed land development project.

Mr Thomo replied that the bidders for the land development project were the ABLANDS Group and a trade union consortium. ARMSCOR would not put up capital but they would provide the land. The winning developer would then develop the land, let the office block for a time, and then return the buildings to ARMSCOR.

Mr M Booi (ANC) asked more on the profile of employees in relation to employment equity. What plans were in the pipeline to solve the financial difficulties. He emphasised that the Committee was aware that it was difficult to sell arms "when there was no war".

Mr Thomo replied that the future was unclear because the Department of Defence was taking some of the income-generating activities away from ARMSCOR. The Corporation has been looking to explore the African market.

Ms N Borotho, ARMSCOR General Manager: Corporate Affairs, replied that the corporation still had to meet their Black Economic Empowerment (BEE) target of 27% which were due in March 2008. The reason for falling behind in this was to the scarcity of other companies in the arms industry. The corporation was not satisfied with their contracts with BEE companies because the transactions amounted to less than R1 million. The contracts covered things such as cleaning and catering. ARMSCOR reserved the right to choose its BEE partners, conduct pre-tender conferences, and post-tender debriefings. On employment equity, she said it was difficult to find women with technical qualifications.

Mr Booi enquired whether there had been discussions between the Military Council, ARMCOR and the Department of Defence regarding the financial situation.

Mr Thomo replied that the Department of Defence had been making plans but the Corporation had not been adequately informed. They were hoping to be informed about the final decision in due time.

Mr Booi indicated that the Committee was willing to ask the Department about its plan for ARMSCOR's future. Mr Shah added that Members did not approve of strained relations between the Department and ARMSCOR. He suggested that ARMSCOR write a letter to the Committee and point out issues had to be sorted out. The Committee would then take up those issues with the Department.

Mr K Montsisi (ANC) said that it appeared as if the problem was communication between the two parties. He emphasised that it was the role of the Committee to raise those problems.

Mr Thomo admitted that there were communication problems between ARMSCOR and the Department. Sometimes ARMSCOR would come up with solutions problems that confronted the corporation but the Department would not follow them up. He emphasised that ARMSCOR’s purpose at this Committee meeting was to brief Members, not to complain.

The meeting was adjourned.