ATC240209: Report of the Oversight visit to the Armscor Dockyard in Simon’s Town, Western Cape, by the Portfolio Committee on Defence and Military Veterans on 13 September 2023, Dated 07 February 2024

Defence and Military Veterans

Report of the Oversight visit to the Armscor Dockyard in Simon’s Town, Western Cape, by the Portfolio Committee on Defence and Military Veterans on 13 September 2023, Dated 07 February 2024

1. Introduction

The Portfolio Committee on Defence and Military Veterans (PCDMV) conducted an oversight visit to the Armscor Dockyard at Simon’s Town on 13 September 2023, as part of its oversight programme. This formed part of the Committee’s Parliamentary Oversight programme over the Department of Defence and the Armaments Corporation of South Africa (Armscor).

Purpose of the oversight visit

The primary aim of the oversight visit was for the PCDMV to conduct a site visit to the above-mentioned facility to acquaint itself with the conditions and challenges experienced at this facility, especially in view of the reported rejuvenation of the facility. It was further aimed at facilitating inputs and insights to enhance the Committee’s oversight function, as part of its oversight programme for the 2023 calendar year. Moreover, the Committee intended to receive an update on progress with regards to key projects of the DOD undertaken by Armscor, including Project Hoefyster, SA Air Force support contracts and the progress related to the use of funds allocated for the Medium Airlift Capability in 2023/24.

1.2 Committee Members and support staff

The Delegation comprised of the following people:

Members of the Committee:

ANC

Mr. V.C. Xaba (Chairperson)

Mr. TN Mmutle

Ms TI Legwase

Ms MRM Mothapo

Ms PA Phetlhe

Mr SJF Marais

Mr M Bond

EFF

Mr T Mafanya

Support Staff:

Bryan Mantyi - Committee Secretary

Oliver Ndou - Committee Assistant

DOD, Armscor and AGSA representatives

Mr T Makwetla - Deputy Minister

Vice Adm M Lobese - Chief SA Navy

R Adm M Nkomonge - SA Navy

Adv SP Mbada - Armscor CEO

Mr JG Grobler - Armscor CFO

Mr M Teffo - Group Exec: Acquisition & SCM

Ms F Skweyiya - Armscor Board Member

Mr M Peecha - Executive Manager Armscor Dockyard

Mr H Green - Armscor: Senior Manager Aerosystems

Col T Motloung - Liaison Officer SANDF

Col E Meyer - Acting DAA

Mr K Lebelo - DOD

Mr M Lekgoro - PLO (Deputy Minister)

Mr S Dlamini - DOD

Ms K Poikanyo - Auditor General of South Africa

1.3 Programme

The Portfolio Committee members were welcomed by the Executive Manager of the Armscor Dockyard, the Senior Management of Armscor and the Chief of the SA Navy. The Committee commenced its visit with a tour of the facility. The Committee was taken to the various sections and workshops within the Dockyard, including the Synchro-lift, Submarine Workshop, Gasket Manufacturing Workshop, Dry dock, Dock Control Room, Internal Combustion Engine Workshop, Emission Spectrometer Lab and Chemistry Lab.

Having concluded the walkabout, the Committee proceeded to a meeting with the Ministry, the Chief of the SA Navy; Armscor and the management of the Dockyard. During this session Armscor presented to the Committee on the activities of AB Logistics, Project Hoefyster; the SA Air Force Support contracts, progress related to the use of funds allocated for Medium Airlift Capability in 2023/24 and the management of the Dockyard presented on the Dockyard capabilities and its profitability.

2. Tour of the facility

The tour of the Dockyard started with the Committee being taken to the open waters within the Dock where the SAS Manthatisi was docked. The Committee was informed that there are currently three submarines within the Dock, including the SAS Manthatisi which has successfully completed its maintenance repairs, while the remaining two submarines are currently undergoing refit service and maintenance. Internal engineers are utilised to do the Level 3 maintenance service work. SAS Manthatisi has successfully completed surface trials and is set to undertake post maintenance diving trials.

The Committee was further shown a 53-year-old decommissioned submarine, the SAS Assegai, which has been placed in long term preservation and maintenance for purposes of display at the Navy Museum as a Heritage Site. This submarine is currently being preserved in a collaborative effort between the SA Navy and the Heritage Management Group. In terms of the engineering plan, the work on the submarine will be completed by March 2024, dependent on the efforts to secure funding for the removal of the submarine to the museum site.

The Committee visited the synchro-lift facility which is used to lift vessels when undocking onto the repair grounds. This is a critical asset within the dockyard and it was pointed out that this facility must be kept operational at all material times for the dockyard to function optimally. This facility also presents commercial opportunities for private business within the dockyard.

The Committee proceeded to view the two submarines undergoing maintenance within the workshop. The SAS Charlote Maxeke and SAS Queen Modjadji were undergoing paint work. The Committee was informed that the two submarines and one frigate are concurrently undergoing refits which have been staggered in various stages to ensure timely completion of all work. All of the work on the SA Navy assets is done on site for patent and security reasons. It was noted that funding constraints and high-level skills shortages pose a challenge to the work of the Dockyard in as far as the refits are concerned. In mitigation, the Dockyard has established the Centre for Refit Skills in order to bridge the gap and guarantee the safety of assets of the SA Navy.

The SA Navy pointed to a need for the Dockyard to establish relations with other stakeholders with a view to move away from Original Equipment Manufacturer (OEM) restrictive procedures. It was noted that the OEM withhold information which is pertinent for the continued maintenance of the platform with a view to limit the repair solely to themselves. This limits the operational readiness of platforms, in some instances as a result of small components which could have been acquired elsewhere at a lesser cost. The Dockyard has equipped its personnel with skills during the acquisition of the platforms but such personnel have reached retirement age and are exiting service. Skills transfer initiatives are underway to equip remaining young engineers with the required skills in order to undertake the refit work.

The Committee observed an internal capability that has been established within the Dockyard with the procurement of a gasket manufacturing machine. The Dockyard has trained an engineer to operate this capability in order to manufacture gaskets that meet the required specifications. This has resulted in savings for the entity and has proven to shorten turnaround times for the completion of maintenance work.

The Committee further viewed the Dry Dock facility. This facility is about 50 meters deep and can accommodate at least two vessels at a time. The facility is utilised for the repair of vessels and was indicated as a major source for revenue. The Committee was also shown the Pump Control Room where the flooding and the de-watering of the dock is operated.

The delegation was also taken into the Internal Combustion Engine Workshop where the work on the engines of the vessels takes place. The workshop is equipped with technology for the ultra-sonic cleaning as well as spray painting of the engine components.

The delegation was taken to the Non-Destructive Testing facility where the functioning of the emission spectrometer lab was demonstrated to the Committee. This lab conducts tests on specimens taken from the vessels in order to detect and ensure protection of vessels from corrosion. In concluding the tour of the facility, the Committee inspected the Chemistry Lab that conducts monthly assessments of samples of fluids taken from the various vessels in order to ensure the engine system functions optimally. Amongst other functions, the lab assesses whether the diesel utilised has not been contaminated and that it meets the required standards.

3. Meeting Session:

3.1. Presentation by Armscor on AB Logistics

Armscor provided the Committee with information on the financial contributions, costs and operating activities of AB Logistics. AB Logistics includes both the rendering of freight forwarding services and travel booking services. Comprehensive logistics management services are provided to the SANDF, SA Defence Industry and foreign defence forces with regards to military sensitive commodities and hazardous cargo. This service is in support of the acquisition supply chain requirements during import and export process, rendering air, sea, rail, road freight and chartering distribution globally to all stakeholders. As a registered member of the International Air Transport Association, it is responsible for the travel arrangements of the DOD, Ministry of Defence and Military Veterans and Armscor.

For 2022/23 it was budgeted that AB Logistics would have a net positive contribution of R6.9 million considering revenue of R32 million and operating costs of R25.1 million. The actual figures for the 2022/23 financial year resulted in a net contribution of R18.7 million considering revenue of R46.7 million was generated and operating costs of R28 million were incurred. However, a provision of R20.2 million for outstanding amounts owed was made in line with the Armscor Financial Policy which then result in a net shortfall of R1.5 million for the financial year. For the 2023/24 financial year, a positive contribution of R4.3 million is budgeted based on R37 million of revenue and R33 million of operating costs

3.2. Presentation by Armscor on Project Hoefyster

Armscor provided feedback to the Committee on how far its engagements with Denel, the Department of Defence on Project Hoefyster have progressed subsequent to deliberations with the Committee. The entity reported as follows:

Project Hoefyster Project Control Board (PCB) was held on 6 April 2023 and recommended that Phase 1 (development) of Project Hoefyster be completed with acceptance of indicated specification deviations, as well as acceptance of the already manufactured 4 Pre-Production Model’s (PPM’s); and the delivery of 1 Battalion to the SA Army.
Phases 1 and 2 of Project Hoefyster are contracted separately.
Implications of PCB decision are:

Phase 1 contract to be amended to provide for new agreed completion dates, and possible

consideration of penalties.

Project Hoefyster Acquisition Plan (currently providing for delivery of 3 Battalions) has to be amended to provide for partial acquisition of production models.

Phase 2 contract (currently providing for delivery of 3 Battalions) to be subsequently amended to provide for partial acquisition only 1 Battalion.
Based on the waivers obtained for the deviations from specification, Denel is currently proceeding with work to complete Phase 1 (development) which will culminate in the establishment of a Product Baseline for each of the 5 vehicle variants.
Indicated Phase 1 completion dates are as follows:

Section Variant April 2024
Fire Support Variant July 2024
Command Variant December 2024
Missile Variant March 2025
Mortar Variant December 2025
All Variants ILS December 2025

Denel is currently busy with costing the Phase 2 (production) requirement, and has indicated that they will only be in a position to provide definite costs by end of December 2023.

3.3. Presentation by Armscor on progress related to the use of funds allocated for Medium Airlift Capability in 2023/24 and current levels of serviceability of the SA Air Force support contracts

Armscor provided an overview of the progress related to the use of funds allocated for Medium Airlift Capability in 2023/24 and the current levels of serviceability of the SA Air Force fleet.

3.3.1. Progress related to the use of funds allocated for Medium Airlift Capability in 2023/24

The Committee was informed that:

The SA Air Force received an allocation of R1 billion from National Treasury during 2023/24 for Medium Airlift transport capability.
Allocated funds are to be utilised to increase the availability of C130 Medium Transport Aircraft as currently only one of the five C130 aircraft in the fleet is operational.
Armscor has contracted Marshalls Aerospace in the United Kingdom for major servicing and obsolescence replacement The work will be conducted at a total cost of R470 million, with completion of the first C130 expected in December 2024 and the second C130 10 months thereafter.
Armscor has also received a requirement from the SA Air Force on 11 August 2023 for procurement of spares to the total requirement value of R40 Million. The Entity is currently processing contract placement.
The balance of R490 million will be utilised for the servicing of at least 8 engines for the C130 fleet.

3.3.2. Current levels of serviceability of the SA Air Force fleet

Armscor gave an overview of current levels of serviceability focusing on platforms that have no service contract in place.

Kind Air - Currently there is no contract in place and the new order placement is in progress with target order placement target date being the 30 September 2023. The order is awaiting approval by the adjudication committee of Armscor.
CESSNA CARAVAN 208 - Currently there is no contract in place. National Treasury approved the cancellation on 20 July 2023. Technical discussions are being held between the client and Armscor for avionics upgrades.
DAKOTA C47-TP - Currently there is no contract in place as no valid bids were received. The Dakota C47 TP is a very old aircraft, thus the support for this aircraft is very limited in South Africa and the world. Discussion are being held with SAAF regarding the future usage of the aircraft due to reasons indicated above.
BK117 - Currently there is no contract in place. Contractual negotiations have been finalised, and is expected that the new contract will be put in place by the end of September 2023.
Super Lynx 300 - Currently there is no contract in place. Contractual negotiations have been concluded and is expected that the new order will be placed by 20 October 2023.

3.4. Presentation by Dockyard Management on the Dockyard capabilities and profitability

The Executive Manager of the Dockyard, Mr M Peecha, briefed the Committee and noted the following:

The annual allocation for the Dockyard is R280 million which includes the secondary transfer payment from Armscor.
The estimated operating expenditure constitute 92.5% of the revenue. The main cost driver is the direct personnel cost, which then leaves approximately 7% of the budget available for maintenance and operations.
Proposed solution includes an increase in commercial income generation and optimise operations through innovation and technology initiatives. The estimated commercial revenue is R12 million, subject to docking facility availability and SA Navy requirements.
Dockyard capabilities include, Maintenance, Repair & Overhaul; Manufacturing; Technical Support; Testing; Engineering Services; Docking; and, Mobile equipment and Information Technology.

The Executive Manager of the Dockyard further highlighted a number of challenges faced by the Dockyard and mitigating steps:

Ageing buildings and infrastructure – The matter is receiving attention at Executive Level to address regarding the limited support from the Department of Public Works and Infrastructure.
Availability of Critical Spares – the Dockyard aims to implement strategic sourcing initiatives with long-term contracting and a panel of service providers.
Wharf Cranes – There are plans to replace the old fleet and implement a long-term maintenance contract.
Labour – There is a need to increase the capacity and strength to support the increasing demand maintenance and repairs due to the aging labour fleet and prioritise new job requirements linked to the current demands.
Integrated Planning – Synchronisation of planning activities between the Fleet and Dockyard.
Consistent and stable power generation – Upgrading and modification of the power generating system.
Insufficient Operational Funding – This challenge can be offset by generating commercial revenue.

4. Committee Observations

The following are some of the observations made by the Committee:

The Committee expressed disappointment with the feedback provided on the progress with Project Hoefyster. The Committee noted with concern that in spite of waivers made in favour of Denel, the entity has sought further concessions on the long overdue first phase of the project. The Committee expressed immense frustration at the failure of the Project Control Board to reach a final decision on matters related to the Project. It was highlighted that the Committee has had numerous engagements with Armscor, Denel and the DOD on the matters of contention related to non-delivery by Denel, yet years later there seems to be no sense of urgency to reach a final decision on the future prospects of the Project. The Committee expressed a view that the Executive Authority of both Departments needs to intervene.
The Committee further noted that Denel seems to be in a financially precarious position, as the entity has been unable to produce annual audited financial statements for a number of audit years. This is a serious concern for the Committee given that the DOD transfers funding to the entity to ensure it retains the capacity to provide its services to the DOD. The Committee questioned what reassurances have been made to the DOD and Armscor that the funding made available has been utilised for the intended purpose. In addition, it was questioned whether value for money has been derived from such transfers to Denel.
The Committee expressed serious reservations with regards to the appropriateness of the current funding model between Denel and the DOD.
Noting the strategic importance of Denel to the sustenance of SANDF capabilities, the Committee again stressed that the entity is currently not located correctly within the Department of Public Enterprises.
The Committee questioned whether the upgrades to the SA Air Force C130 which are underway in the UK have commenced given the approval which has to be given by the UK government. The Committee was reassured that the upgrades are underway as the necessary approval has been secured.
The Committee further expressed concern that Denel seems not to have the required capacity to carry out work on the C130s which had to be contracted to a company abroad, whereas the DOD transfers funds (fixed costs) to sustain the capacity within Denel.
The Committee observed that some of the buildings within the Dockyard are old and the have not been properly maintained, resulting in visible roof leaks and cracked walls. The Committee called on the Dockyard management to make use of Defence Works Formation to deal with the maintenance and rejuvenation of buildings.
The Committee encouraged the Dockyard to maximise opportunities for revenue generation, but warned that such efforts must not be to the detriment of the SA Navy.
The Committee expressed concern with regards to the compensation of employees’ expenditure within the Dockyard, which was noted as excessive and unsustainable.
The Committee decried the fact that a number of service and maintenance contracts are allowed to lapse and only once they have lapse are renewal processes are convened. The Committee called on the DOD to play a more active role in the management of all contracts. Members reminded the Department of its previous suggestion for a contract management officer within the DOD.

8. Recommendations

The Committee made the following Recommendations:

Given the failure of the entities as well as the Departments (DOD and Department of Public Enterprises), the Committee recommends that the Executive Authority of both Departments needs to intervene with a view to provide direction to the challenges and charting a way forward on Project Hoefyster.
Moreover, noting the strategic importance of Denel to the sustenance of the Defence Force capabilities and the sovereignty of the Republic, the Committee recommends that the Ministers of Defence and Public Enterprises should seriously deliberate on the appropriateness of the location of the Entity within the Department of Public Enterprises.
The Committee recommends that Denel; Armscor; the Department of Defence and the Department of Public Enterprises should review the current funding model with a view to come up with a more viable and sustainable accounting mechanism that results in greater value for money to the Defence Force.
While the Committee is aware of the funding constraints that the Dockyard is subjected to, the Committee recommends that the Entity prioritises the rejuvenation of its building infrastructure utilising funding made available by Armscor and the DOD. In addition, thereto, the Committee recommends that the Dockyard makes use of available commercial opportunities with the SA Navy taking priority.
The DOD and Armscor should ensure better contract management of maintenance contracts and ensure that such contracts are renewed or new contracts put in place prior to the expiration of existing contracts.

Report to be considered.

Documents