Armscor 2006/7 Annual Report: briefing

DEFENCE PORTFOLIO COMMITTEE
30 October 2007
ARMSCOR 2006/7 ANNUAL REPORT: BRIEFING

Chairperson: Mr F Bengu (ANC)

Documents handed out:
Armscor 2006/7 Annual Report

Audio recording of meeting

SUMMARY
Armscor briefed the Committee on its Annual Report. He noted that it had received a clean audit report with no qualifications, but that some of the targets in relation to transformation were not met, although a task team and committees had been addressing themselves to the issue. The Simon’s Town Naval Base was to move over to Armscor, which was investigating having a training centre there. Special defence packages would end in March. The financial performance was detailed, and it was noted that Armscor had managed to achieve a surplus for the year as opposed to the loss budgeted for. Its group performance showed a huge improvement in the turnover. There was under spending, due in part to contracts placed being limited as a result of full requirements not being received, and underperformance by the industry, including late delivery of Ground Based Air Defence requirements. Underspending in strategic defence package programmes was due to savings on Return on Equity (ROE) and underperformance by the industry. The strategic objectives of the organisation with respect to black economic empowerment were outlined, and it was noted that although the organisation achieved over target in terms of black appointees, it was unable to reach the female targets due to scarcity of women with the right technical skills in the labour market. Members asked about the transfers from the Department of Defence to Armscor, why Parliament was not informed of certain deals, the weaknesses in the internal Audit Committee report, the fact that its report did not meet Treasury guidelines, the need to address how Armscor would deal with issues of going concern and transformation, clarity on the Simon’s Town dockyard, and financial implications of certain upgrades to aircraft. Further questions were asked around the original plans and the change of direction of strategy, plans for skills development, the core mandate, the need to report on the goals and where the organisation had achieved those goals, clarity on the black economic empowerment issues, late appointments to vacancies, the need to re-evaluate the advertising strategy, skills transfer, the position with the dockyard in Durban, and the need for a detailed report on strategic facilities before the next reporting session. The Committee noted that it would be useful to have engagement with Armscor throughout the year.

MINUTES
Armscor Annual Report 2006/07: Briefing
Mr Sipho Thomo, CEO, ARMSCOR, opened his presentation by saying that the financial report for the year was a clean one with no qualification. He said that transformation had not been completed. A number of committees were set up to address that task but the delay was due to a number of issues picked up by the team.  The Simon’s Town Naval base was a facility of the Navy, but would in future be a facility of ARMSCOR. ARMSCOR was looking at having a training centre at the dockyard. Mr Thomo said that the special defence packages were beginning to draw to a close, with the last delivery in March 2007.

Mr C J Hoffmann, Manager, Finance and Infrastructure, ARMSCOR, gave a breakdown of the financial performance of ARMSCOR. ARMSCOR, without its subsidiaries, received total grant income from the Department of Defence (DOD)  of R347.6 million. It had managed to achieve a surplus for the year as opposed to the loss budgeted for. The figure reflected as depreciation, was due to a change in accounting practices, which meant that ARMSCOR  and had to do a revaluation of the useful life of its assets. ARMSCOR’s group performance showed a huge improvement in the turnover, due to additional 4 Hawk aircrafts that were imported and cleared to the value of R282million, and rate of exchange profit on all foreign stock sales of the subsidiary DMD, to the amount of R5.6 million. The increase in cost of sales was due to additional 4 Hawk aircrafts to the value of R279 million, and cost of business opportunities not materialising to the value of R14.5million.

Mr Sipho Mkwanazi, Acting General Manager:  Acquisition, ARMSCOR, commented that planned spending for acquisition activities in the first quarter amounted to R187.6 billion; however actual spending was only R175.5 billion. The last quarter reflected actual spending of R252.8 billion as opposed to the planned spending of R340.6 billion. The slight increase was due to operational funds received. One of the goals of ARMSCOR was acquisition of category 1 defence material excluding strategic defence acquisition.  Contracts actually placed by ARMSCOR were R3.28 billion, which was 74.8% of the baseline. The deviations from this goal were due to contracts placed being limited as a result of full extent of requirements not being received (only 74.2% was received)..Under spending on cash flow was due to insufficient requirements being received and underperformance by the industry, for example the late delivery of Ground Based Air Defence requirements. 

Mr Mkwanazi said that the strategic defence package programmes had a baseline of R6.3 billion, but its goal was to pay R5.86 billion. It achieved R5.27 billion, being 89.9% of the baseline. Under spending on cash flow in strategic defence package programmes was due to savings on Return on Equity (ROE) and underperformance by the industry. He said that the Hawk Aircraft logistics and milestones were not achieved and conversion of four aircraft up to required operational capability was not completed. 

Mr Xolani Magojo, General Manager, Human Resources, ARMSCOR,  highlighted the strategic objectives of the organisation with respect to black economic empowerment. The organisation had to have a certain number of black, disabled, and female employees in order to receive the funding from the transformation grant.  The total target of black people was 80% and the actual achievement was 95%. The target of female appointees in technical functional groups was 20%, but only 12% could be reached due to the scarcity of women with technical skills in the labour market.

Discussion
Dr G Koornhof (ANC) asked about the transfer from the Department of Defence (DOD) to ARMSCOR. He said that the neither the Chairman nor the CEO had spoken about it in the presentation. He asked if there was value for money in that transaction.

Mr Sipho Thomo responded that the DOD actually got more value than the money they gave ARMSCOR. He said that the service level was more than the transfer. He said that their biggest challenge was being requested to cover areas that were not covered in the service level agreement. He said that in future it would be useful  if the organisation reported on the service level agreement.

Dr Koornhof commented that with respect to the infantry combat vehicle, only one offer was received and the contract was concluded.  He asked where the deal had been submitted and discussed and why Parliament was not informed.

Mr Thomo responded that the company with which ARMSCOR had concluded the deal went to media when it was finalised, and that they had mentioned it in this report, as they believed it was an important matter that was worth mentioning.

Dr Koornhof commented that the internal Audit Committee report was a very weak report. He said that there was no breakdown of the members of the committee and the number of meetings that they attended, and the committee had not commented on the internal controls of the organisation.

Mr Thomo responded that ARMSCOR was having a problem with the Audit Committee. He said that the Minister and the Board of Defence wanted the board of ARMSCOR to dissolve, and in addition now that the Chairperson’s term of office was over, she did not want to renew for another term. He said that this had caused a lot of strain, as it was very difficult to get people to join the organisation owing to the uncertainty around possible dissolution of the board. Mr Thomo acknowledged the shortcoming in the way in which the Audit Committee reported.

Dr Koornhof commented that the issue about the Audit Committee was not about human resources. He said that in the report there was no mention of the number of meetings that the committee had attended.

Mr Hoffman responded that the report was done according to the legal requirements. He said that the attendance register of the Audit Committee was on page 64 and page 65, and he referred the member to those pages.

Dr Koornhof suggested that in future, in the preparation of its reports, ARMSCOR must use the guidelines of National Treasury and not only rely on the Auditor-General. He added that the Auditor-General had raised the going concern as an emphasis of matter, meaning that it would have an impact on the group and possibly lead to qualification. He asked ARMSCOR to pay special attention to this.

Mr Thomo acknowledged the suggestion and said that this would be taken into consideration.

Dr Koornhof commended the organisation for receiving an unqualified report but suggested that in the next report, it should tackle how it was going to deal with issues of going concern.

Mr Thomo said that the issue of going concern related to the transformation matters of ARMSCOR. The Minister had asked that recommendations be made with respect to transformation and Mr Thomo said that matters had improved in this direction. He said the recommendations would set a clearer mandate of what had to be done and this would improve the process of implementing transformation measures.

Mr R Shah (DA) asked for clarity on the inadequacy of the Simon’s Town dockyard to service the facilities that ARMSCOR currently had. He also asked what was the basis of negotiations with Germany.

Mr Thomo responded that ARMSCOR was not necessarily entering into negotiations with Germany, but was engaging with European countries. He said the issue around the dockyard included upgrading equipment, improving efficiencies and building a training centre. A lot of money had to go into this and when companies were approached, they wanted to know what they would get in return for their investment, and they also wanted to put their people on board in the projects they were to fund. He cited this as the reason why this process was still on-going.

Mr Shah asked what the financial implications were of the two Hawk aircrafts that needed to be upgraded, because ARMSCOR said that the existing aircraft were not good enough or were outdated. He asked why these aircrafts were being upgraded now.

Mr Mkwanazi responded that there were supposed to be 24 aircraft delivered, but at the time of writing the report, only eight had been delivered. The ones delivered were brought in with operational capability baseline 1 (OC1) and they would be finally upgraded to operational capability 3 (OC3). He said that some would be delivered at operational capability 2, and two would be put aside to be upgraded to OC3. This process had no extra financial implications because it was a contractual matter.

Ms P Daniels (ANC) said that the Simon’s Town project was a strategy for retaining skills and solving the problem of scarcity of skills.  She asked what happened to the original plans that the organisation said it would be following, as the plans now seemed to have changed. She asked what informed ARMSCOR’s decisions.

Mr Thomo responded that the decision making process had various steps. ARMSCOR would get the DOD to give them a briefing about what the Department was intending to do. Then the Board would look to ARMSCOR and what was going on within it. The final step involved further engagement with the DOD about their work and the findings within ARMSCOR, and goals were strategised from that.

Mr O Monareng (ANC) commented that ARMSCOR had said, in terms of skill development and employing black people, that there would a 95% achievement. However he did not see any plans for that happening in the report.

Mr Thomo responded that ARMSCOR had not said that that it wanted 95% of the staff base to be black, but rather when it employed people from outside, it would make sure that 80% of the people employed to vacancies would be black. He added that people still thought that the face of ARMSCOR was “old, white, Afrikaner men”. He said that ARMSCOR would not be retrenching these men because they still had the critical skills that the organisation needed.

Mr Monareng asked what the core mandate of ARMSCOR was.

Mr Thomo responded that the core mandate of the organisation was outlined in the governing legislation.

Mr V Ndlovu (IFP) requested that in future when ARMSCOR came to report, it must inform the Committee how the organisation started with the goals, and where it hoped those goals would take it. He then referred to the details of the requirements for black economic empowerment (BEE) and asked what the 30% mentioned related to, and whether it was a percentage of something that had not been mentioned.

Mr Magojo responded that these were the criteria used to qualify for BEE requirements. He said that the 30% was 30% of shares, which was mentioned in the points rating for BEE,  and it was in line with government criteria.

Mr Thomo added that when money was received from government, 80% of that money related to operating expenditure and the remaining 20% was allocated for transformation. The organisation would have to try to recover that whole 20% by meeting certain BEE requirements. He said that the Act stated that for a company to be regarded as a BEE company, and therefore to qualify for funding by government\, it must comply with certain criteria. One of these was that 30% of the shares in the organisation must be owned by black people. If some black people were disabled or were female, then a higher rating still would apply. The aim was to get the full amount of this 20% allocated to transformation.

Mr M Moatshe (ANC) asked why there was late appointment to vacancies as stipulated in the report.

Mr Thomo responded that in one year, the organisation had a certain amount of money that it allocated for filling the vacancies. It would then advertise, but might get a poor response, and have to advertise again before being able to make an appointment. Then the person to be appointed still had to go through security clearance prior to being appointed. If the applicant failed this security clearance, perhaps through theft or some misdemeanour several years ago, ARMSCOR could not employ the person and the whole recruitment drive would have to start  again. That was what is meant by late appointment to vacancies.

The Chairperson commented that ARMSCOR must evaluate its advertising strategy, because if it was using newspapers like Business Day, which was not read by many people, it needed to look at placing advertisements in newspapers that the average South African could afford and read frequently.

Mr Moatshe referred to under spending, and asked what was meant by the positions of women being frozen, and what the reason for this was.

Mr Magojo responded that the word “frozen” was perhaps inappropriate, and that it should have rather read “positions not filled” He said that ARMSCOR prioritised a position to be filled with a person of a certain profile. Interviews would be done and if the right candidate was still not found, the filling of that position would be delayed. If it was still impossible to fill it after a while, ARMSCOR would be left with no choice but to fill the position with a non-transformation candidate.

Mr Thomo added that certain positions were easily filled by women, but the challenge for the organisation lay in finding women who were highly skilled in certain areas in which there were vacancies.

Ms Daniels asked how much skills transfer ARMSCOR had done in the past financial year.

Mr Magojo (responded that ARMSCOR had set up a specialised orientation program based on the skills, competencies and experience of the person being employed. This programme was specifically designed to orientate a person, based on their capabilities, as opposed to that person simply being placed somewhere and being expected to grow and expand into other departments.

Mr F Bengu (ANC) asked what happened to the people running and managing the dockyard in Durban.

Mr Thomo responded that he did not know what happened to that dockyard because it was run by the Navy and it had closed. He said that the major reason for the Navy wanting to give the dockyard to ARMSCOR was that the government procurement system meant that it took too long to get spares for fixing assets. The navy also had major problems in retaining skilled workers because government requirements stipulated how much they could pay people, based on their job category.

Dr Koornhof (ANC) commented that ARMSCOR had certain strategic facilities and requested that the Committee be included in the discussions between ARMSCOR and the DOD about transformation. He then asked ARMSCOR to give the Committee a detailed report about these strategic facilities before the next reporting session.

The Chairperson commented that the Committee had agreed with the Department of Defence to have quarterly meetings and suggested that ARMSCOR and the Committee have engagement throughout the year, and not necessarily wait till year end when they came to report on their financial performance.

Dr G Koornhof (ANC) commended ARMSCOR on their hard work. The Committee would be pleased to see more females on the ARMSCOR team.

The meeting was adjourned.