Election of Chairperson; Castle of Good Hope Annual Report 2007/08; ARMSCOR 2007/2008 Annual Report: briefing

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Defence and Military Veterans

17 November 2008
Chairperson: Elected Chairperson: Mr S Ntuli (ANC)
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Meeting Summary

The Committee elected Mr S Ntuli (ANC) as its new Chairperson.

The Castle Control Board and the Department of Defence briefed the Committee on the Annual Report of the Castle Control Board (CCB) for 2007/2008. The scope of the annual report covered the composition of the Castle Control Board (CCB), the human resource management, corporate governance, performance information and the management report. The Members also received a comment from the Parliamentary Research Unit, highlighting concerns around the financial statements and the governance of the Board.

Members Some of the issues raised were the strategic performance objectives, the castle’s business activities; improvements to non-compliance and other matters raised by the Auditor-General report.
Matters relating to the appointment of the Castle CEO; castle maintenance expenditure; strategic business plan and future public-private partnership (PPP) were also addressed.

The issues of concern highlighted by the Committee researcher related to the financial statements and the governance of the CCB.
Members commended the CCB on their prudent and responsible handling of the Castle’s revenue and congratulated the Board on the unqualified report from the Auditor-General.

The Chief Executive Officer and the General Manager: Finance and Administration of ARMSCOR briefed the Committee on the Corporation’s annual report for the 2007/2008 financial year.  Information on the restructuring of ARMSCOR and the establishment of the Defence Evaluation and Research Institute (DERI) was provided.  ARMSCOR had taken over the management of the Naval Dockyard Simonstown in September 2007.  Details of various Strategic Defence Packages were included in the presentation.  ARMSCOR Corporation reported an increase of R52 million in total assets, an increase of 5% in revenue and a surplus of R52 million.  ARMSCOR Business (Pty) Ltd reported a deficit of R4.6 million, attributable to the decrease in turnover.  The Naval Dockyard Simonstown reported a surplus of R7.8 million.  A comprehensive report on the performance against the operational goals was submitted and the presentation was concluded with the actions taken to address the concerns raised by the Committee at the previous annual report.

Members were concerned that the Committee was not briefed on the proposed restructuring of ARMSCOR.  Questions were asked about the restructuring and establishment of the DERI, the Naval Dockyard Simonstown, the cancellation of the Vistula project, the matter of the grievances lodged by the General Manager: Corporate Affairs and her subsequent paid leave of absence for more than a year, the delays announced for the Airbus A400M aircraft project, the donation of vehicles to the Central African Republic, the Medical Benefit Fund, the transfer of skills, the Defence Industrial Participation (DIP) obligations under the Gripen aircraft project, the safety concerns at some of the facilities, the increase in the accounts receivable reflected in the annual financial statements and the effects of the death of the Secretary for Defence and the resignation of the Minister of Defence on ARMSCOR projects.

Meeting report

Election of new Committee Chairperson
The Committee firstly attended to the formal election of a new Chairperson, as required by Rule 131 of the National Assembly Rules. The Committee Secretary called for nominations.

Ms P Daniels (ANC) nominated Mr S Ntuli (ANC). This nomination was seconded by Dr E Schoeman (ANC), and unanimously supported by all Members.

Mr Ntuli then duly took the Chair and thanked members for their vote of confidence in his ability to chair the Committee. He noted that over the past nine years defence matters were regarded as having to serve all political interests and he stressed that the defence force must not be made into a political playing field. He reminded members that their oath on taking office required them to remain honorable and to serve the country with their best efforts.

Mr R Shah (DA) congratulated Mr Ntuli, and expressed his sentiment that the Committee did serve the best interests of the country, and he looked forward to continuing this healthy and progressive work.
Similar sentiments were echoed by Mr V Ndlovu (IFP) and Mr G Koornhof (ANC).

Castle of Good Hope (Castle) Annual Report: Research Unit of Parliament summary and analysis
The Parliamentary Research Unit’s summary and analysis of the Castle of Good Hope Annual Report was tabled. 

Mr Peter Daniels (Committee researcher) provided an overview of performance for the year 2007/08 for the Castle of Good Hope. He noted that the Castle Control Board (CCB) received an unqualified report from the Auditor-General that reflected a net profit of R1.8 million, which was a 14% increase from the previous year’s net profit. He also mentioned the increase in 5% of Castle visitors and its active involvement in supporting the Arts through an interest in helping communities for non-commercial purposes. He also highlighted the Castle’s co hosting of the Cape Town Military Tattoo in conjunction with the South African National Defence Force (SANDF)
Mr Daniels said that challenges faced by the CCB revolved around the appointment of representatives and the establishment and implementation of management tools such as an internal audit system, an audit committee, a supply chain policy and a risk management policy.

Castle Control Board Annual Report 2007/08: Department of Defence (DOD) Briefing
The Chairperson welcomed the Acting Secretary for Defence: Mr Tsepe Motumi and his delegation to the proceedings.

Major-General Justice Nkonyane, Acting Chief of Logistics, Department of Defence, noted that the scope of the Annual Report covered the composition of the CCB, the human resource management, corporate governance, performance information and the management report. (see attached presentation for details under each heading).Under the highlights, he noted that the Castle had made a net profit of R1.8 million, and had achieved an increased number of visitors, events (for which rental was paid) and marketing. There remained challenges around appointing the Chief Executive and Chief Financial Officers. He noted that the State support to the Castle consisted of the Defence Force personnel and the Chairperson of the CCB.

He then went on to give a general review of operations. The transfer of the Castle to the Department of Arts and Culture would involve the drafting of the Castle Management Act Repeal Bill and there was a joint task team working on this. There had been a visit by Standing Committee on Public Accounts and non compliance that had been highlighted was addressed. There had been a presentation to this Portfolio Committee in March when the Repeal Bill was discussed and rectification of non compliance was also raised.

The day to day management of the Castle was then described, with a description of the kinds of events that took place, the fact that there had been 130 000 visitors to the Castle, and he set out how the Castle Section and the asset maintenance was being managed.

Ms Adre  Aggenbach, Department of Defence, reported on the establishment of an Internal Audit Committee, which was to hold its first meeting on the 18 November 2008. She also reported that a rectification plan was initiated to address non-compliance matters. A human resources plan and a risk management policy were to be established. In addition, a supply chain was established and implemented and 60% of the vacancies had been filled. She further mentioned that all relevant documentation would be completed by a CCB bookkeeper, and that this would then be distributed to South African Revenue Service (SARS). Insofar as appointment was concerned, all the CCB posts were supported by appointment letters, a management directive had been completed and 60% of the vacancies had been filled.

She then submitted the report on the financial statements and performance information, stating that the Auditor General had highlighted some areas of non compliance, but most of these had already been addressed, as they were regarded as a strategic priority in the light of the failure of the Repeal Bill to pass.

Mr Koornhof congratulated the CCB on the unqualified report received by the Auditor-General. He stated that the management of the castle was for the most part satisfactory.

Mr Koornhof, however, questioned if the outstanding non-compliance report included a strategic business plan. He stressed it was important for the CCB to have a business plan that would be rolled out over a number of years as it could resolve budget and performance weaknesses.

Mr Koornhof sought clarity on the financial statements of the annual report that dealt with related parties and their income. He specifically asked if these were market related figures used for reinvestment in the castle.

Mr Koornhof also enquired about the appointment of the Chief Executive and Chief Financial Officers, and sought clarity on how these appointments would be paid for.

Mr Koornhof expressed his concern about maintenance work that remained in arrears and questioned how this related to the Department of Public Works (DPW). He then queried he statement in the presentation that major maintenance was achieved.

Major-General Nkonyane addressed Mr Koornhof's concern regarding a strategic business plan. He explained that it still needed to be evaluated. He also noted that the management of the castle had to be revisited in accordance with the Castle Management Act, but that all related parties were under the management of the CCB until a more sustainable solution was reached.

He stressed the importance of the Chief Executive Officer appointment as it would allow for short and medium term business plans to be taken forward. He expressed his concern that there was an outstanding challenge in regards to the remuneration for this post. He also expressed the need to employ a qualified accounting firm to manage all accounts, with the aim to have the financial provision to employ a suitably skilled CEO.

Mr Ndlovu asked for clarity on the rectification plan and the internal audit charter. He enquired about the rationale for the composition of the CCB.

Major-General Nkonyane noted that the rectification plan addressed matters of concern raised by the Auditor-General. He stated that certain management structures such as the audit committee, the supply chain management and the appointment of the CEO were put in place to address these matters, and to minimise risk. He clarified that the internal Audit Charter ensured that all policies were in accordance with the Public Finance Management Act (PFMA) and its regulations.

Major-General Nkonyane stated the rationale behind the composition of the CCB was difficult to understand and explain, but that it was important that it be executed in terms of the Castle Management Act.

Ms Daniels echoed Mr Koornhof’s congratulations to the CCB on its achievements. She maintained that Parliament had reiterated that the Castle should remain the property of the Department of Defence (DoD) and that it was responsible for the maintenance of the site. She suggested that the CCB liaise with the Department of Public Works for assistance,  as the amount of money spent on maintenance was excessive.

Ms Daniels sought clarity on stakeholders whose artefacts were kept in the castle, and enquired if any contribution was made by them towards the maintenance and security of these artefacts.

Ms Aggenbach replied that the restoration and maintenance of artefacts held in the Castle’s Military Museum fells within the mandate and responsibility of the CCB. No contribution from stakeholders was received.

Ms Aggenbach also explained that the Department of Public Works had appointed a specialist consultant to establish a maintenance program to the value of R900 000, but explained that the Department could not provide the CCB with a fixed amount of expenditure on the castle.

Mr Shah required feedback on the option of public-private partnerships (PPP) and the progress on this. He also sought clarification on the 40% vacancy balance and how this was constituted. He too expressed concern for the increased amount in respect of maintenance and repair. He also noted that a stock taking process on the Castle was conducted but was not reported on.

Major-General Nkonyane welcomed the PPP as a definite option and included it in the mandate. He stated that ideas put forward in public hearings inspired the PPP involvement, and that this would result on a positive impact to the maintenance function. He also stressed that the budget did not fully reflect the running of the Castle, but only spoke to its maintenance, and he hoped that this might become more evident in the PPP function.

He further stated that the filling of vacancies was dependent on stakeholders and that stock taking would be reflected in the 2008/09 financial year report.

Ms Aggenbach reflected on the vacancies and reported that the Board had obtained one representative of the City of Cape Town, one representative of South African Tourism Board and two representatives appointed by the Ministry of Defence. She mentioned that one representative of the Provincial legislature of the Western Cape and the CEO’s appointment were still outstanding.

Mr M Moatshe (ANC) required clarity regarding the remuneration and management of the SANDF members, and to whom these members accounted.

Major General Nkonyane replied that the CEO would be responsible for the day to day functions of the Castle and that all members would report to him. He also mentioned that the CCB monitored this management structure and the enforcement of business plans.

Dr E Schoeman (ANC) sought elaboration on the PPP setup and urged the CCB to keep applying its mind to arrive at a solution to preserve the Castle in a viable manner. He expressed his concern that the appointment of the CEO might affect the balance sheet negatively, and asked if there were future projects planned that could increase the income.

Major-General Nkonyane replied that a future revenue development project involved Het Bakhuys and that if regular lessees could move over to the Castle then this was another revenue generation stream. He also noted that the Castle was seen as a ‘cash cow’ and that if it was better managed it could generate more income, as shown by some of the Castles in England. He mentioned that the PPP could assist in supporting these particular events.

Mr Koornhof asked for clarity regarding the strategic business plan and its projected time scale. He also sought clarity on the CEO’s appointment and stated that this appointment must reflect value for money. He requested that more strategic thinking was required to make the Castle a into a self sustaining entity that would generate income in a viable manner. He offered the assistance of the Committee to the CCB in the achievement of this objective, but stressed that the DOD must remain responsible for the maintenance of the castle.

Major-General Nkonyane noted that a three-year business plan was important in addition to the appointment of a credible CEO. He mentioned that the CEO’s appointment was not finalised and requested that an agency be enlisted to better manage the appointment process, in order to recruit the best candidate for the position.

Adv H Schmidt (DA) sought clarity on the financial statements of related parties as reflected in the Annual Report, and questioned the relationship and structural inter operations between the CCB, the Iziko Museum and the Department of Defence.

Major-General Nkonyane stressed that the Castle did not operate on market-related principles; for example, schools were not charged large fees. He said the Castle generally operated along non-profit organisation principles. He further stated that the relationship between the three parties had a long history that was difficult to untangle, as at one stage the Castle was run completely by the Defence Force.

Ms Aggenbach added that the Iziko Museum was responsible for the management of the William Fehr Collection held in Die Kat at the Castle. She pointed out that the CEO of Iziko Museums was a member of the CCB, as both were intimately related to the management of the castle. She also stated that the entry fee was divided in thirds: two-thirds of which would go to the CCB and one third to the William Fehr Collection.

Mr L Diale (ANC) sought clarity on the issue of performances, which reflected a 14% increase in profit. He questioned where this money was being held.

Major-General Nkonyane replied that the money was held in a reserve fund that presently amounted to R6 million and was to be used for reinvestment.

Mr Shah requested the reason for payment of R12 000 to Captain Morkel (Castle Management) as reflected in the Annual Report. 

Ms Aggenbach replied that the amount reflected a reimbursement of a cell phone contract and overtime salary.

Mr Koornhof reiterated his congratulations to the CCB on its operation and hoped that this would continue in the future. He also offered the Committee’s assistance on any management issues that might occur in the future.

Mr Ntuli expressed his concern regarding the maintenance of historical military heritage sites; for example the Voortrekker Hoogte and other historical gravesites. He asked that these sites be better maintained, and appealed to the Department of Defence to address this issue. He then clarified the Committee’s role in ensuring that the Department protected taxpayers’ money, with the projection that South Africa would become a first world economy.

Mr Ntuli asked for closing comments from the Secretary of Defence.

Mr Tsepe Motumi, Acting Secretary for Defence, thanked the Committee for its input and interrogation of the Annual Report and assured Members that any concerns expressed by the Committee would be addressed in the near future.

The morning session was adjourned.

Introductory remarks to the afternoon session
During the afternoon session the Acting Chairperson (Mr G Koornhof- ANC) extended the apologies of the newly-elected Chairperson of the Committee, Mr S Ntuli.

Mr Sipho Thomo (Chief Executive Officer, ARMSCOR) introduced the delegates from ARMSCOR:  Mr Gerhard Grobler (General Manager: Finance and Administration), Mr Sipho Mkwanazi (General Manager: Acquisitions), Dr Francois Portgieter (Acting General Manager: Human Resources) and Ms Minah Sinobue-Bloem (Senior Manager: Corporate Communications).

Mr Koornhof asked why Dr Molefe (Chairperson of ARMSCOR) was not present to brief the Committee on the organisation’s annual report.

Mr Thomo explained that Dr Molefe was unable to attend as he was attending a board meeting of PetroSA in his capacity as the Chairperson of that board.

Mr T Motumi (Acting Secretary of Defence and Director-General of the Department of Defence) said that the Department would have preferred it if another member of the ARMSCOR Board was present at the briefing in the absence of the Chairperson.

Mr Koornhof suggested that the presence of both the CEO and the Chairperson of the Board at the presentation of the ARMSCOR annual report was made a standing rule in future.  He expressed regret at the absence of Dr Molefe.  Members of the Committee introduced themselves and Mr Koornhof welcomed the attendees at the briefing.

Mr Koornhof tabled the agenda for the meeting and requested that the matters concerning the restructuring of ARMSCOR, the issue of the grievance lodged by the General Manager: Corporate Affairs, the Vistula project, the funding of ARMSCOR, the Defence Industrial Participation obligations under the various projects, the delay of the Airbus A400M, the acquisition objectives, the Rooivalk helicopter project, the Hoefyster infantry combat vehicle project, the ARMSCOR Business (Pty) Ltd subsidiary, performance against goals, future plans and the comment made by the Auditor-General on the continued operation of ARMSCOR in the light of the restructuring initiatives were included in the presentation.

Mr Koornhof pointed out that the Committee’s role was not limited to a consideration of ARMSCOR’s performance as a state-owned entity.  The Committee needed to be informed of all issues affecting ARMSCOR in order to provide the necessary support and assistance.

Briefing by ARMSCOR on the 2007/08 Annual Report
Mr Thomo presented an outline of the presentation to the Committee (see attached document).

An overview of the Corporation included receipt of an unqualified audit report for the period under review.  The Auditor-General however commented on the position of ARMSCOR as a going concern against the background of the restructuring of ARMSCOR, which was not finalised before the end of the period under review.  The Minister of Defence (The Honourable Mr M Lekota) had requested that a study was undertaken into the establishment of a Defence Evaluation and Research Institute (DERI) to assess the acquisition of defence material.  The study included an investigation into practices in other countries.  The study was completed and a report was submitted to the Minister, recommending that the acquisition responsibility of ARMSCOR remained unchanged, that a tender board was introduced and that ARMSCOR was changed from a Schedule 2 to a Schedule 3 Company (or equivalent) in terms of the Public Finance and Management Act (PFMA) by National Treasury.

The Minister had also requested that a study was undertaken into the integration of ARMSCOR Business (Pty) Ltd into the DERI.  The study was completed and it was recommended that ARMSCOR Business (Pty) Ltd be included in the DERI, that the DERI reported to the Department of Defence and was changed to a Schedule 3 Company in terms of the PFMA.

The Minister accepted the recommendations made by the study teams.  The Chairperson of ARMSCOR requested that the Minister sign a document confirming his acceptance of the recommendations.  Subsequently, the Minister indicated his intention that the DERI reported to the Department of Science and Technology.  The Chairperson of ARMSCOR requested clarity on the matter but Mr Lekota resigned as the Minister of Defence before the matter could be finalised.

ARMSCOR took over the management of the Naval Dockyard Simonstown (NDS) on 1 September 2007.  An initial assessment of the facilities was completed and ARMSCOR was currently implementing new management structures and finalising the business plan.

Mr Thomo reported on progress made with the Strategic Defence Packages.  The last three of the four frigates were handed over to the South African Navy, four maritime patrol helicopters were delivered to the South African Air Force, 23 light utility helicopters were delivered, the first Gripen aircraft was delivered for ground crew training and 24 Hawk lead-in fighter trainer aircraft were handed over to 85 Combat Flying School.

Black Economic Empowerment (BEE) targets were achieved and new targets were set on a continual basis.  Most transformation goals were achieved.

Mr Gerhard Grobler (General Manager: Finance, ARMSCOR) presented the balance sheet and income statement for the 2007/08 financial year for the Corporation and Group.

Total assets increased from R600.2 million to R652.5 million for ARMSCOR Corporation and from R663.1 million to R706.4 million for the Group.  The organisation received no external funding.  A capital investment of R28 million was made in computer equipment and machinery to maintain operations.  ARMSCOR revenue increased by 5% but revenue from subsidiaries decreased by 14.6%.  The disposal of obsolete defence material resulted in a loss of R15.1 million for the Group.  The surplus of R52 million resulted from the recognition of the surplus on the Medical Benefit Fund.

Details of the financial performance against budgets of ARMSCOR Corporate, Naval Dockyard Simonstown and ARMSCOR Business (Pty) Ltd were provided.  The surplus of R44.3 million declared for ARMSCOR Corporate was attributed to the surplus on the Medical Benefit Fund, unfilled vacancies and an increase in interest received on cash reserves.  The Naval Dockyard Simonstown reported a surplus of R7.8 million, attributable to the non-appointment of contract workers and an increase in interest received on the transfer payments received.  ARMSCOR Business (Pty) Ltd reported a deficit of R4.6 million, attributable to the reduction in turnover and personnel costs.

Mr Grobler summarised ARMSCOR’s performance against the operational objectives set for the 2007/08 period.  Details of the Corporation’s performance against the goals set for the acquisition of defence material, facilities and services, the establishment of a program management system, the provision of a quality assurance capability, the disposal of defence material, the support, maintenance and management of strategic defence industrial capabilities, resources and technologies, the establishment of a defence industrial participation program management system, corporate governance, BEE spending initiatives, energy saving and the management and development of human resources were provided.

Mr Grobler reported on the actions taken by ARMSCOR on recommendations made by the Committee during the previous annual report.  Issues previously raised by the Committee included the structuring of the Audit Committee report and the management of the ARMSCOR transformation process to avoid adverse comment by the Auditor-General.  Details of the strategic facilities managed by ARMSCOR were included, i.e. Gerotek, Alkantpan Test Facility, Institute for Maritime Technology, Protechnik Laboratories, Hazmat Protective Systems, Defence Institute, Flamengro, Ergotech and Armour Development.  A five-year skills development plan had been developed and targets were set for the employment of women and black personnel in the organisation.  The steps taken to address the loss of skills were outlined.  The relationship between ARMSCOR and the Department of Defence was addressed in the CEO’s annual report.  A list of acronyms was included in the annual report.

Mr Koornhof thanked the delegates from ARMSCOR for the presentation and opened the floor for questions from the Members.

Mr R Sayedali-Shah (DA) expressed concern that the Committee was not briefed on the transformation of ARMSCOR before the process commenced.  The Committee had not seen the defence review and he wanted to know if the transformation of ARMSCOR was in line with the defence update.  He wanted to know what effect the transformation of ARMSCOR would have on the country’s regional responsibilities and on the African continent in general.

Mr Sayedali-Shah wanted to know what the implications were of the delay in the Airbus project on the country’s peace-keeping operations and need for airlift capacity.  He asked if penalties would be imposed as a result of the delay.

Mr Sayedali-Shah asked what the implications were of the restrictions imposed by the National Conventional Arms Control Committee (NCACC) on the disposal of vehicles.  He wondered about the decision to donate vehicles to the Central African Republic at the time the South African Reserve Force experienced difficulty in transporting reservists during Operation Bata.

Mr Sayedali-Shah noted that not all the targets set for the Naval Dockyard Simonstown were met.  He was aware that a key partner had withdrawn and wanted to know why the partner withdrew and what the implications were.

Ms P Daniels (ANC) noted that the Naval Dockyard Simonstown was taken over on 1 September 2007 but the process was not completed for more than a year.  She requested further information on the post-retirement medical benefits referred to in the annual report.

Mr M Moatshe (ANC) noted that the reason given in the annual report for the cancellation of the Vistula project was that the bidders did not meet critical criteria.  The costs incurred amounted to R12 million.  He asked who was responsible for ensuring that the bidders met critical criteria and if any disciplinary steps were taken against the person involved.

Mr Moatshe referred to the matter of the General Manager: Corporate Affairs who was granted paid leave of absence for more than one year, at a cost of R1 million.  He understood that she was recently reinstated and wanted to know if she was back at work and if she occupied the same position as before.

Mr Koornhof was also concerned that Parliament was not briefed over the proposed restructuring of ARMSCOR.  He said that a legal framework needed to be in place and the ARMSCOR Act had to be repealed or amended accordingly.  The establishment of the DERI was reported on page 28 of the ARMSCOR Annual Report and ARMSCOR Business (Pty) Ltd, The Defence Peace, Safety and Security division of the CSIR and the Overberg Test Range division of Denel were listed as entities included in the DERI.  The chain of command was unclear and the Committee was not sure where the DERI would fit in.  He expected that some of the questions raised would be answered at the workshop scheduled for 27th November 2008.

Mr Koornhof asked if the report on the internal disciplinary hearing on the cancellation of the Vistula project was completed.  He wanted to know if the responsible person was identified and if any action was taken by ARMSCOR.

Mr Thomo pointed out that he could only reply to the questions asked and issues raised by the Members from the perspective of ARMSCOR and could not speak for the Ministry or the Department of Defence.  Responding to the questions raised concerning the transformation of ARMSCOR, he explained that the Minister of Defence had requested that the acquisition of defence material by ARMSCOR and the establishment of the DERI were reassessed.  With the agreement of the Minister, a team comprising members from ARMSCOR, the Department, the CSIR and Denel was formed to consider the best corporate format to handle the acquisition of material.  The team recommended that ARMSCOR remained unchanged but was changed from a Schedule 2 to a Schedule 3 company in terms of the PFMA.  ARMSCOR agreed that the corporation should be considered to be a Schedule 3 company as Denel was not incorporated into ARMSCOR.  The ARMSCOR Act would have required amendment if the acquisition responsibility was transferred from ARMSCOR to the DERI.  The Minister had accepted the recommendation but resigned before the necessary documents were signed to establish an audit trail.  Another team investigated the establishment of the DERI and considered similar organisations in the United Kingdom, Sweden, Germany and India.  The Minister envisaged a testing and evaluation entity in the DERI, which fell outside ARMSCOR and reported to the Department of Defence.  The Minister resigned before confirming the establishment of the DERI.  Subsequently, the Minister considered that the DERI should form part of the CSIR, which reported to the Department of Science and Technology.  The matter was still under debate and was not concluded.  He assumed that the Minister would have approached Parliament and submitted a report to the Committee for the legislative requirements that would have been necessary.

Mr Thomo said that ARMSCOR was unique in Africa and its relevance was limited to South Africa.  ARMSCOR could only assist other countries with the procurement of military hardware or to conduct research with the approval of the Minister.

Mr Sipho Mkwanazi (General Manager: Acquisitions, ARMSCOR) advised that the Airbus A400M project involved six countries and a delay of six months was announced as a result of problems with the engine software and the final assembly line.  ARMSCOR anticipated further delays of up to one year.  Delivery of the first aircraft was expected in nine months’ time.  He was unsure of the impact of the delays on the South African production and awaited the official impact study.  He confirmed that penalty clauses were applicable if pre-determined milestones were not met.

Mr Thomo added that the Department of Trade and Industry had arranged a number of work packages for South African companies, including Denel.  The current situation at Denel was serious and he expected that the company would be adversely affected by the delays in the Airbus project.

Responding to the question about the NCACC restrictions on stock sales, Mr Thomo explained that a problem arose when the Department of Defence submitted applications from ARMSCOR for permits to the NCACC and other officials from the Department subsequently raised objections to the issuing of the permits.  The matter had been resolved.  He said that the issue was the erosion of capability in the Department but ARMSCOR was providing assistance in this regard.

Mr Thomo advised that the Minister was authorised to donate vehicles to other countries and ARMSCOR had no say in the matter.  He suggested that the question regarding the donation of vehicles to the Central African Republic was referred to the Department of Defence.

With regard to the Naval Dockyard Simonstown, Mr Thomo explained that ARMSCOR looked for a partner to recapitalise the dockyard.  The equipment at Simonstown was old and needed to be replaced.  A dockyard in the United Kingdom expressed interest but withdrew when it realized that the intention was not for the UK dockyard to profit from the management of the Simonstown dockyard.  Another company however expressed an interest in investing in South Africa by establishing a training facility in the Western Cape.  A memorandum of understanding was signed and the interested party was currently engaged in formulating a proposal for submission to ARMSCOR in April 2009.  He explained that ARMSCOR conduced audits and an assessment of the Naval Dockyard Simonstown after taking over in September 2007.  The process took some time and had to be done thoroughly as the primary responsibility was to provide maintenance services to the South African Navy.

In response to Ms Daniels’ question, Mr Grobler explained that the conditions of employment of ARMSCOR personnel required a fund to be established to provide post-retirement health care to employees.  The fund was invested in the stock market and its annual liability was determined by actuarial calculations.  The fund’s assets exceeded its liabilities and the surplus was reported in the financial reports.  He expected the position to be reversed for the following financial year.

Mr Thomo sketched the background to the cancellation of the Vistula project.  ARMSCOR had systems in place whereby different teams put out tenders and evaluated the tenders received.  Vistula was a large project for the procurement of logistical vehicles.  A company named LMT had advised the Army on the management and effective operational use of its vehicles.  LMT did an excellent job and the Army recommended that ARMSCOR made use of their services to develop a vehicle integration strategy.  ARMSCOR commissioned LMT to develop computer models but the company was restricted from providing assistance to bidders for ARMSCOR tenders.  Bidders for the Vistula tenders were requested to provide vehicles for testing at the Gerotek facility in South Africa.  Most of the R12 million costs were attributable to the testing of the vehicles.  After the tests were completed, a preferred supplier was identified.  Unfortunately, the identity of the preferred supplier was leaked into the public domain before the tender process was completed.  The unsuccessful bidders wrote a letter to the Minister of Defence, claiming that the preferred supplier was in collusion with LMT and that the tender process was flawed.  The Minister ordered and external investigation, which uncovered irregularities and found that the ARMSCOR processes were flawed.  The project was cancelled and ARMSCOR conducted its own internal investigation into the matter.  The internal investigation confirmed the irregularities in the tender process but found no evidence of fraud.  The problem appeared to be incompetence of the personnel involved.  ARMSCOR took disciplinary action against the personnel concerned but was unhappy with the results of the investigations.  Preventative measures had to be taken to avoid a recurrence of the problem.  Processes were reviewed and amended to ensure that weaknesses in the system were addressed.  The Department of Defence was requested to re-open the Vistula project in November 2008.  The project was postponed to February 2009, following the death of the Secretary for Defence, Mr J Masilela.

In response to Mr Moatshe’s question, Mr Thomo referred to the meeting held on 24th June 2008, when the matter of the grievance lodged by Ms Nthathi Borotho (General Manager: Corporate Affairs) and her subsequent extended paid leave of absence was exhaustively discussed by the Committee with the Chairperson of the ARMSCOR Board.  During the meeting, Dr Molefe answered all questions asked by the Members of the Committee and had advised that a decision had been taken by the Board on the matter.  He was however unable to provide details of the decision as it had not been conveyed to the two parties involved (Ms Borotho and Mr Thomo).  On 3rd July 2008, the Acting Chairperson of the Committee, Mr Ntuli, wrote to Dr Molefe to request copies of all the documentation related to the matter.  The documents were sent to Mr Ntuli and confirmation obtained that the documents were received.  Mr Thomo listed all the documents submitted to the Committee.

Mr Koornhof suggested that discussions were held between the Ministry of Defence, the Department of Defence and ARMSCOR on the restructuring of ARMSCOR and that the Committee was informed once a decision had been reached.  He requested that the Committee was informed within one week of the disciplinary action taken by ARMSCOR in respect of the findings of incompetence in the handling of the Vistula project.  The Committee wanted the reassurance from ARMSCOR that there will be no legal challenges when the new tender was issued in February 2009.  He invited the Acting Secretary for Defence to respond to the issues that were raised.

Mr Motumi explained that the restructuring of ARMSCOR was part of the overall transformation of the defence sector.  The Department of Defence was the end user and a major stakeholder in the transformation process.  He said that the transformation of the sector arose out of a meeting held two years ago between the Ministers of Defence, Science and Technology and Public Enterprises.  The reason why Parliament had not been informed was that the matter was still under discussion and had not been finalised.

Mr Motumi disagreed with the explanation given by Mr Thomo on the issue of ARMSCOR applications for permits from the NCACC.  He said that the Department would not submit applications and then raise objections to the permits being issued as such action would be detrimental to the cost of the defence of the country.

Mr Motumi explained that the vehicles donated to the Central African Republic were not in working order and were not operational.  ARMSCOR acted in its capacity as the disposal agency for the Department of Defence in the matter.

Mr Motumi wanted a more comprehensive discussion on the Vistula project.  He suggested that a separate briefing be made to the Committee on Vistula and on the other projects that ARMSCOR was involved in.

Mr Koornhof was not sure whether the Committee’s program allowed sufficient time to schedule a briefing before Parliament was adjourned.  He suggested that ARMSCOR’s input was limited to a report on the internal disciplinary action taken in the Vistula matter.

Mr Sayedali-Shah clarified his earlier question on the role played by ARMSCOR on the African continent.  He wanted to know if the African market was taken into consideration in the restructuring of ARMSCOR and the establishment of the DERI.

Mr Sayedali-Shah asked if the General Manager: Corporate Affairs was reinstated in the same position she occupied before she went on paid leave of absence.  He presumed that there would be a strained relationship between herself and the CEO.  He asked how her grievances were resolved and what impact the issue had on the morale of the personnel.  He wanted to know if she intended to remain employed by ARMSCOR.

Mr Moatshe noted that the number of black employees had increased since 2001.  He requested further information on the positions occupied by black employees.

Mr Koornhof proposed that the restructuring of ARMSCOR was finalised and the Committee informed accordingly.  If other sectors were affected, the appropriate Portfolio Committees must be informed as well.

Ms Daniels understood that the recommendation of the study group was that ARMSCOR be left as is.  She asked what the cost of the investigation amounted to.  She objected to decisions being taken without consulting the Committee and then presenting Parliament with a fait accompli.

Mr Koornhof agreed that the Committee had to be kept informed as it was responsible for the legal framework within which ARMSCOR and the DERI operated.  He warned that the Committee would not be forced into rubber-stamping decisions and approving legislation on which it had not been informed.

Mr Koornhof recommended that ARMSCOR submit a report to the Committee on the final conclusion of the Borotho matter.  A deadline of 4th December 2008 was agreed with Mr Thomo.

Mr Koornhof recommended that the Department of Defence and ARMSCOR made a presentation to the Committee on the Vistula project at a future date.  In the interim, ARMSCOR was requested to submit a report on the internal disciplinary action that was taken.

Mr Sayedeli-Shah suggested that a written report on the Vistula project itself was submitted to the Committee.

Ms Daniels requested more clarity on the 5 year plan for the transfer of skills.  She referred to the proposed training of people at the Naval Dockyard Simonstown mentioned in the presentation and asked if the training would be given to the same employees that were already receiving training.  She asked if recipients of the post-retirement medical scheme would be allowed to continue receiving benefits if the person joined another medical scheme.

Adv H Schmidt (DA) asked for details of the Defence Industrial Participation (DIP) obligation under the Gripen program.  No details were provided on pages 10 to 12 of the Armscor Annual Report.

Mr Koornhof explained that examples of the technology transfers, export orders and jobs created were required.

Mr N Fihla (ANC) was concerned that only 16 out of 20 learnerships were completed in the time allowed.  He requested further information on the need to counsel 55 employees on their financial difficulties when bonuses were not paid.  He requested clarity on the employee health and safety concerns mentioned in the presentation.

Dr Francois Potgieter (Acting General Manager, ARMSCOR) advised that the number of employees aged 55 and older were identified as a Human Resources risk that had to be addressed.  Programs needed to be in place for succession planning and the transfer of skills from personnel nearing retirement age.  The core skills were identified and the need to bring in people from outside the organisation to achieve the Corporation’s transformation goals was recognised.  ARMSCOR’s approach was to consider pools of skilled people rather than skilled individuals.

Mr Thomo advised that the training at the Naval Dockyard Simonstown will differ from the other training and development initiatives.  The focus will be on providing technical training of personnel.

Mr Grobler undertook to advise the Committee of the details of the DIP obligations under the Gripen program.

Dr Potgieter explained that the learnerships were sponsored by the SETA and the courses were completed by the employees in their spare time.  ARMSCOR was satisfied with the percentage of completed learnerships.  The debt counseling was offered to employees who found themselves in difficult financial circumstances after the decision was made not to pay the expected bonuses in the previous financial year.

Mr Thomo said that a safety audit identified some problem areas at the Naval Dockyard Simonstown and at the Alkantpan facility.  Management action was taken to address the issues and the safety report can be made available to the Committee.

Mr Koornhof remarked on the substantial increases reported in the balance sheets (see pages 67 and 87 of the ARMSCOR Annual Report).  He noted that the accounts receivable for ARMSCOR Corporation had increased from R52.2 million to R73.5 million.  In the notes to the annual financial statements, the accounts receivable from other related parties increased from R3.4 million to R18 million.  The age analysis reflected an increase in receivables for more than 120 days from R10.8 million to R20.8 million.  He asked what the reasons were for the dramatic increases in the amounts and if it was attributable to one large account.

Mr Grobler replied that the figures included the amount payable to ARMSCOR by the Department of Defence for the maintenance of the building occupied by the Corporation.  The matter was under discussion with the Department.  The accounts receivable included the Medical Benefit Fund.

Mr Sayedali-Shah asked which projects were affected by the death of the Secretary for Defence and the resignation of the Minister.  He suggested that an audit was undertaken to assess which matters were delayed and required action.

Mr Thomo explained that meetings were scheduled with the Secretary for Defence and the Minister to discuss specific matters rather than submitting documents.  Subsequent to the death of the Secretary for Defence and the resignation of the Minister, meetings were rescheduled.  It was found that discussions with the new incumbents took longer.

Mr Motumi had taken note of the issues raised during the meeting.  He said that the Department preferred to make a verbal submission to the Committee on the Vistula project rather than submitting documentation as certain aspects needed to be kept confidential.  The presentation can be made whenever the Committee was available.  He suggested that the Department submitted its annual report to the Committee before the other entities in future.

Mr Koornhof thanked the delegates from ARMSCOR for their participation and assured the Corporation of the Committee’s continued support.  He reiterated the importance of ARMSCOR in the defence arena and urged the Corporation to keep the Committee informed of the challenges faced in carrying out its mandate.

The meeting was adjourned.


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