issues eminating from armscor’s annual report for the 2005 / 2006 financial year

ISSUES EMINATING FROMARMSCOR’S ANNUAL REPORT

FOR THE 2005 / 2006 FINANCIAL YEAR

Presented to the

Portfolio Committee on Defence

13 MARCH 2007

Introduction

The Portfolio Committee on Defence, having conducted departmental hearings on the annual report of Armscor on Tuesday, 12 September 2006, prepared a report and the report was adopted by the Committee on Tuesday 24 October 2005.

Contained in the report were specific questions to which Armscor had to prepare information to be submitted to the Portfolio Committee and this presentation serves to address these questions.

The presentation furthermore addresses the paragraph numbers as reflected in the report adopted by the Portfolio Committee.

Issues from Armscor’s 2005/2006 Annual Report

3 Armscor Group Operational Budget 2005 / 2006

4 Performance against Acquisition goals

5 SANDF Operational Support

6 Manage DOD Strategic Facilities

7 Transformation Challenges

8 Risk due to insufficient funding for Armscor

9 Auditor General’s Report

10 Conclusion and Recommendations

3. Armscor Group Operational Budget

There is a need for Armscor to build its skills base. Therefore a briefing on reskilling needs to be available in 6 months

The committee needs a report with regard to the replacement of the main frame and technology renewal

The committee needs clarity on why Armscor spend 72% of its budget on salaries

Briefing on reskilling of Armscor employees

Staff categories in Armscor.

Critical enabling competencies.

Service delivery application / domain area.

Concerns / issues.

Interventions.


1. Support Staff: Eg. HR, Corporate Affairs, Finance.

2. Non-technical support to the core function: Registry management, Legal, Financial, etc.

3. Technical personnel.

Categories 1 & 2 generally easily available on the market. On appointment need orientation on Armscor processes.Category 3 consists of personnel with tertiary qualifications in a technical discipline (engineering, technology, scientist).Category 3 personnel are extremely difficult to find. Scarcity / shortage exacerbated by the fact that other organisations need people with these qualifications.

Staff categories in Armscor


Project Management (integration, scope management, time management – scheduling, cost management, HR management, etc.).

Technology Management (planning and coordination).

Engineering Management (requirement analysis management, system design, implementation & integration, etc.).

Critical enabling competencies


Competencies applied in the following areas:

Broad military.Vehicles (combat, combat support vehicles, artillery systems, etc.)Aircraft (fighter aircraft, helicopters, unmanned aerial vehicles, etc.)Vessels (submarines, mine counter measure vessels, auxiliary support ships, etc.)Electronics (information warfare, cryptography, navigation systems, etc.)Weapons (guided missiles, torpedoes, rockets, bombs, etc.)Diverse (special forces, diving systems, shelters & infrastructure, etc.)Support (general support, reporting & communication, etc.)

Service delivery application / domain area


The issues identified regarding employees in the core function include:

People with the right qualifications not readily available in the market.

People with the right qualifications even when they have the technical experience still need military specific domain knowledge which can only be gained by on-the-job training and experience.

Transformation challenges: people from designated groups (DGs, ie. Black people, women and people with disabilities) even more in short supply, the market pays a premium for them and they tend to be more mobile.

More experienced employees (possible mentors/coaches) form the actual execution core and are therefore generally loaded which puts a strain on the coaching focus.

Aging workforce (average age = 45) and associated retirements.

Ongoing general war / competition in the market for the same small pool of competencies.

Concerns / Issues


These problems are addressed through the following measures:

Addressing pay as much as is affordable.Bursaries and trainee programme.Investment in coaching skills and coaching.Recognition for people who fulfil the coaching role.Succession planning (creating pools of suitably qualified personnel through on-the-job training).Financial support for staff who want to embark on further studies.Ongoing profiling of staff in terms of pending retirements, termination trends, work loading and making provision for continuity.Investment in developing specific learnerships.Investing in an e-learning infrastructure to enable employees to learn on their own with less support than would otherwise be required.Always striving for more financial investment on trainees.Employing younger people and in line with the transformation goals.Sending people on training courses.

Interventions

Replacement of the main frame and technology renewal

Initiative / Strategy:

Transform current application systems to be more cost effective and include additional functionalities as defined in the User Requirement Statement

Commencement date:

1 April 2005

Objectives:

Technology renewal

Cost reduction

Replacement of the main frame


The Mainframe running costs are high in comparison with client server platforms.

The database systems, programming languages are outdatedOutdated development language such as Cobol and database management systems such as IDMS are rarely supported, as skills are dwindling and expensive. Moreover, training institutions are no longer providing training for these technologies because they are outdated.

Shrinking Defence Budget.

Cyborg is no longer supported with effect from 1 Apr 2007.The application system that is being used by Human Resources Department to maintain employees biographical and leave data. The system was originally bought from Cyborg Systems Africa. This company was taken over by Hewitt Associates however who rendered all support services for the system. Armscor was notified in October 2005 that Hewitt Associates were going to cease all their African Cyborg support operations at the end of April 2007.



Progress The User Requirements Specification completed in October 2006.

An RFI was issued to the industry to assess the cost implications

The price quoted ranged from R45,8m to R213,3m

Reasons for non-achievement

Approval was obtained from the Management Board in May 2006 to delay the project and finalize the enterprise architecture first. The initial approach was not holistic. Important systems were not included.

Action(s) to rectify situation

The scope of the project has been expanded to include other critical systems that were not included in the original scope.

The ICT division has submitted a business case to the Board of Directors to approve funding to the tune of R60m over the next five years.

Time estimates for implementation have been revised from 2009 to 2012 subject to approval of the board and availability of funds.



Item Replacement Cycle

Desktops / Laptops / Palmtops / Pocket PC / Tablet PC

3

Printers 5

Servers 3

Networking equipment 5

Cabling 7

ICT Equipment needs to be replaced on regular cycles as indicated in the following table

Capital renewal


Initial problem statement:IT Capital Budget never enough to cater for all the requirements

ARMSCOR is not getting enough funds due to the budget cuts of the DOD. This has resulted in budget cuts for the IT department, making it difficult to renew the infrastructure and applications.

The total cost of ownership of the current ICT infrastructure and services is approximately R60m and the funding that ICT receives is on average R50m indicating an under funding gap of R10m annually. This is evident in the deteriorating infrastructure and the poor response times being experienced by the users on a daily basis.

In addition, the maintenance, support and maintenance costs of the infrastructure are very high such that no funds are available to develop new systems or renew the infrastructure.

Capital renewal


Objectives:

Provide for the renewal of IT equipment every 3 to 5 years depending on business requirements

To properly plan the purchase of IT equipment so as to minimise disruption of service due to equipment failure

To evenly spread, without the usual peak in budget requirements, spending on replacement

Capital renewal


Capital renewal

How the situation has improved:

Areas for potential cost reduction have been identified and the potential savings have been quantified as a result of the Enterprise Architecture Project

Guidelines in place for managers to allocate the right device to the right person based on the requirements of the job

A project is underway to consolidate the servers at the Head Office in order to reduce maintenance, license and support costs.


Capital renewal

What still needs to be done:

Complete the server consolidation 31/03/07

Deploy initial Thin Client devices 31/08/07

Complete printer consolidation project 30/09/07

Replacement of computers and notebooks annually

Replacement of network components annually

Why Armscor spend 72% of its budget on salaries

Operational budget for 2005/06.

Operational investment/requirements of Armscor.

Skill profile of Armscor.

Organisational structure.


Description Actual 2005/06 Rm

% Breakdown of Actual

Operating Costs

Personnel costs 339,7 72%

Subsistence & Travel 14,5 3%

Computer Services 41,5 9%

Contractor Services 21,8 5%

Water & Electricity 10,2 2%

Other operating costs 27,1 5%

Depreciating 18,4 4%

TOTAL 473,2 100%

Operational budget for 2005/06


Armscor is a service organisation whose operational investment (as reflected in the distribution of its operational costs) is in the competencies of its personnel. This is unlike for example, a manufacturing organisation which has to create a product and which would need machines, raw materials and even a warehousing and distribution infrastructure, which would add to its costs.

Furthermore, the technically complex nature of Armscor’s operational environment demands high level personnel in the technical functional disciplines which leads to a staff profile as indicated on the following slides.

Operational investment / requirements of Armscor


Armscor Broad Band Generic Occupational Level

EX (Executive) Top Management

SU (Strategic Execution/Unique Authority) Senior Management

MP (Managing/Professional Contribution) Professionally qualified, experienced specialists and mid-management

STS (Supervision/Technical/Specialist Contribution)

Skilled technical and academically qualified workers, junior management, supervisors, foremen, superintendents

AS (Advanced Operations/Support) Semi-skilled and discretionary decision making

OS (Operation/Support) Unskilled and defined decision making

Occupational Levels


BB M F M F M F M F M F

EX 4 2 0 0 0 0 2 0 6 2 8

SU 4 2 2 0 1 0 44 3 51 5 56

MP 23 8 8 0 10 2 290 38 331 48 379

STS 39 20 10 8 5 9 44 94 98 131 229

AS 41 60 14 23 2 8 9 50 66 141 207

OS 44 27 9 2 0 0 0 0 53 29 82

TOTAL 155 119 43 33 18 19 389 185 605 356 961

AFRICAN COLOURED INDIAN WHITE TOTAL OVERALL TOTAL

Staff / skill profile


8

56

379

229

207

82

Unlike a typical organisation whose staff distribution profile is triangle shaped, Armscor is more diamond shaped.

Furthermore, in order to fulfil its mandate, the organisation employs people with skills which fall in the higher paying functional groups

(ie.: Technicians, scientists and engineers) which raise the payroll.

4. Performance against Acquisition goals

4.1 Maritime Defence: Strategic Defence PackagesThe committee wish to congratulate Armscor for the deliverance of the 4 Corvettes to the South African Navy, although the submarine programme is complete the committee need clarity on the issues of the 3 month delay

4.2 Air Defence: Strategic Defence PackagesOnly seven of the twelve light utility helicopters were delivered due to technical problems. The Committee needs a report on what are the technical problems that occurred and has this been correctedThe budget for the Airbus has been overspend due to the complete plan not being reflected in the budget, what caused this to happen, and also the additional funds supplied by DOD was not reflected in the baseline that the Committee requested

4.3 Landward Defence: Strategic Defence PackagesThe Committee needs a report on the delay due to the affordability program of the new generation light infantry vehicles and whether has the studies been completedThe Committee needs clarity with regard to the 41 months in the completion of the ground based air defence system due to non-performance by Denel and other sub-contractors

4.1 Maritime Defence: Strategic Defence Packages

Three month delay in submarine programme

The submarine program is running three months behind schedule due to the Contractor working to an over-optimistic schedule associated with the harbour acceptance trials of the submarines as well as some unexpected technical problems encountered during these trials.

Cognisance should however be taken of the fact that the acquisition programme stretches over a total period of eight years which commenced during 2000, and a delay of three months over this period is considered to be negligible.

4.2 Air Defence: Strategic Defence Packages

Technical problems encountered with the light utility helicopter programme

The delivery of the first A109LUH was delayed due to the fact that the process of confirming the qualification results and compliance to specifications took longer than initially planned for.

Due to the time lost to confirm qualification prior to acceptance of the first helicopter, it was not possible to deliver the initially planned number of 12 helicopters within the report period.

4.2 Air Defence: Strategic Defence Packages

Airbus budget and baseline

Armscor had the approval (financial authority) to spend the funds.

The A400 programme has a special arrangement regarding funding within the DOD.

4.3 Landward Defence: Strategic Defence Packages

Delay due to affordability program of the new generation light infantry vehicle

New Generation Infantry Combat Vehicle Product System:

Project HOEFYSTER provides a complete level 5 New Generation Infantry Combat Vehicle Products System (NGICV-PS) to replace the Ratel Infantry Combat Vehicle that has been in service since 1976.

The offer as submitted on 24 February 2005 by Denel as main contractor, as well as a NGICV SV prototype vehicle was evaluated by Armscor and DAPD.

The technical performance of the vehicle offered was mostly on par with the requirements, except for a few minor deviations that could be overcome with some minor design changes or adjustment in the specifications.

The unit production cost and total project cost was not acceptable. The IPT was mandated to obtain the “best offer” from Denel, and present that for consideration to the Armaments Acquisition Steering Board in Project Study Report 3.



NGICV – PS: Background:

Denel submitted a reviewed offer on 18 November 2005 to Armscor. The unit production prices of the combat variants as well as the total project cost was still not acceptable.

During December 2005 Armscor requested Denel to present their “best and final offer” by February 2006. Denel submitted a revised offer (Issue C) on 03 February 2006. The prices offered for the turrets were considered acceptable, but the prices for the vehicle platforms were still unacceptable. Denel, together with Patria and Land Systems OMC, again revised the offer and a more acceptable price was offered on 03 March 2006.

The Project Control Board advised the Integrated Project Team to enter into detail contract negotiations with Denel based on the revised offer received. The offer clarification process then started with Denel.



NGICV -Current Status:

Negotiations with Denel with the aim of arriving at a contracting position commenced on 8 November 2006.

Negotiations with the aim of contracting for a phased acquisition program has progressed very well, although a number of detail issues still need to be resolved before a contracting position can be achieved.

Technically both teams have negotiated for an excellent product.

The outstanding issues to be resolved before a contract can be established, are presently being addressed at a high level between Armscor/DOD and Denel.


41 Month delay in ground based air defence system - Background

Contract was placed on Denel during November 2002.• Value R801 122 885,00 • Activation Date – February 2003• Programme period – 36 months

Delay of 5 months in activation due to problem with guarantee for advance payment.• Extend contract period to 41 months – 30 June 2006

May 2005 – 9 month late delivery notification from Denel

August 2006 – further 45 month late delivery notification from Denel

Total projected slip on program of 54 months – expected delivery date of 30 November 2009

Penalties contractually payable – 10% of contract value (R80.1 million)


41 Month delay in ground based air defence system – Denel non-performance

Delay in programme activation mainly attributed to the following:Extensive delay in contracting of subcontractors – mostly local

Subcontracting of some work elements still outstanding

Delay of more than 1 year in translating Armscor System Specification into subsystem specifications• Specifications on subcontracted elements not finalized

Design shortcomings identified in certain subsystem elements and are now being redesigned• Thermal Imager• Power supply for Radar• Radio Interface Module

Logistics development is lagging due to non finalization of subsystem designs

Large personnel turnover causing loss of continuity


41 Month delay in ground based air defence system – Risk mitigation

All foreseeable risks have been identified and detailed risk mitigation plans have been developed per risk.

Factory acceptance now performed by Armscor per subsystem element as they are completed

Early user exposure to subsystems implemented

• First missile firing by users planned for October 2007

User training on subsystem level implemented instead of first training once entire product system is completed

5. SANDF Operational Support

5.1 Disposal of SANDF surplus stockArmscor shows a net loss of R7.3m due to moratorium put on stock sales by the NCACC, this is of great concern to the Committee and we need to know what preventative measures are being put in place to prevent this from re-occurring


Preventative measures to combat re-occurrence of moratorium

A forum has been established between the Secretary for Defence and the CEO of Armscor to discuss on a regular basis all stock sales issues.

A forum that includes the Chief of Acquisition, the Chief of Logistics and the General Manager: Armscor Business was created to screen all applications before submitting the requests to the NCACC.

6. Manage DOD strategic facilities

The Committee is concerned about the R2.7m net loss on the IMT, Alkantpan and Protechnik under funding and therefore the Committee needs a presentation on what measures are being put in place to prevent this from re-occurring

6. Manage DOD strategic facilities

Measures to combat re-occurrence of under funding of strategic facilities

Various presentations stating the strategic nature of IMT, Alkantpan and Gerotek were made during 2005 which resulted in the DOD providing additional funding of R16m per year as from 2006/07

• IMT R3m

• Gerotek R3m

• Alkantpan R10m

Break-even strategies were developed and implementation started 01/04/2006

No additional funding could be obtained from the DOD for Protechnik. A Break-even strategy was developed and implementation started in 2007.

7. Transformation Challenges

The Committee needs a presentation with regard to preventative measures being put in place to stop the loss of personnel due to salaries and limited growth career opportunities.

The Committee needs a presentation by April 2007 on the transformation and Equity policy with the emphasis on Affirmative Action, Gender and Race in managerial positions


Measures to stop the loss of personnel due to salaries and limited growth career opportunities

Salaries

The problem arose mainly due to the fact that during the years 1992 – 2002 Armscor paid below market average general annual remunerations increments. As a result the company was found, by 2001, to be paying on average, on the 25th percentile of the market.

From 2003 to 2005 Armscor granted above market-average general annual remuneration increments.

In 2004 the position of each employee in relation to the market for the applicable functional group (occupational category) was factored into the exercise to ensure that employees are as aligned as affordable to their occupational categories in the market.



2006 : focus specifically on employees that possess scarce skills which are being utilised in vulnerable capability domains - additional 2% based on scarcity as measured by performance, competence and market position comparability.

Remuneration model to cater for the implementation of interim salary reviews and promotion related salary increments.

Model based on competence, performance and pay level in relation to the market.



Limited career growth opportunities

Broad Banding in order to promote a more flexible utilisation of employees. => Only six jobs levels. (Still the preferred organisational design by management.)

However the system does recognise the movement and associated remuneration alignment within the broadbands. Notwithstanding the within-broad band movement, some employees still find the limited movement between broad bands a cause of grief.



Other factors which may limit career growth, such as under-utilisation of staff are monitored. For instance new employees are subjected to a post-appointment follow up interview which may help identify this problem in time.

Relatively low average turnover rate at less than 6% limits opportunities to create space. (However, due to market factors this may be higher in some categories -typically those where it should be lowest.)

Remuneration measures spelt out above try to mitigate this.)


Transformation and Equity Policy

Consultative Forum

Manpower planning: Demographic profile of the country and the regions.

Numerical goals: Appointment of blacks and women, representation of blacks,

women and people with disabilities.

Diversity sensitization.

Accommodation of people with disabilities. Audits.

Some specific measures: Post-appointment interviews, motivation of

requirements beyond the Honours degree.

Bursary scheme, TDP.

Remuneration disparities.

Training, coaching, composition of project teams.

Manager responsible for AA.


Transformation and Equity Policy

The progress that has been made over the years in the broad band STS (≈Skilled technical and academically qualified workers, junior management, supervisors, foremen, superintendents) is indicated in the following two slides.


Transformation and Equity Policy: Employee statistics for STS +

Employee Total Per Gender STS and above personnel

186184190182171167147135

486483488481483499491485

0

100

200

300

400

500

600

03/2000 03/2001 03/2002 03/2003 03/2004 03/2005 03/2006 01/2007

Female Male

Female Male Total %

03/2000 135 485 620 21.8

03/2001 147 491 638 23

03/2002 167 499 666 25.1

03/2003 171 483 654 26.1

03/2004 182 481 663 27.5

03/2005 190 488 678 28

03/2006 184 483 667 27.6

01/2007 186 486 672 27.7

03/2000 01/2006

21.8%

Female

78.2%

Male

27.7

Female

72.3%

Male


Transformation and Equity Policy: Employee statistics for STS +

Employee Total Per RaceSTS and above personnel

15713812911499917248

515529549549555575566572

0

100

200

300

400

500

600

700

03/2000 03/2001 03/2002 03/2003 03/2004 03/2005 03/2006 01/2007

Black White

Black White Total %

03/2000 48 572 620 7.7

03/2001 72 566 638 11.3

03/2002 91 575 666 13.7

03/2003 99 555 654 15.1

03/2004 114 549 663 17.2

03/2005 129 549 678 19

03/2006 138 529 667 20.7

01/2007 157 515 672 23.4

03/2000 01/2007

Black

7.7

White

92.3

White

76.6

Black

23.4

8. Risks due to insufficient funding

Armscor reported on its inability to appoint a new trainee programme but if you look at the goals set by Armscor part of the things that needs to be addressed is that of the trainee program, the Committee therefore recommends that more funds should be allocated towards this programme

The Committee needs a presentation on the workings of the Armscor bursary scheme, what are the criteria required to qualify for this, what happens after completion of studies, what is the passing rate and what are being done to retain these skills?


Armscor’s trainee programme budget

Armscor recognises that the trainee programme – Talent Development Programme (TDP) forms the bedrock of its renewal and transformation.

As a result would like to invest more financially in this initiative.

Additional financial investment is unfortunately constrained by other critical competing demands on the organisation’s financial resources.


Armscor’s bursary scheme

The criteria are a combination of the following:

Proposed field of study (typically technical, engineering and natural sciences, as well as selected fields such as computer science and commercial science).

Academic merit.

The parents’ ability to support the studies.



Entrance requirements

In order to be eligible to participate, applicants must-

a. Have completed Grade 12 with University exemption.

b. Be in or have already written and passed their first year

c. Have expressed interest in a career within the defence industry

d. Be willing to become employed in Armscor.

e. Be able to obtain and retain the required positive security clearance.

f. Have relevant subjects to enable them to be employed in Armscor.



What happens after completion of studies?

The bursars are appointed into the TDP.

Historically some were lost.

Have now adopted a system of linking the provision of bursaries and the appointment of trainees to long-term staff plans.

Adjusted the pay levels.



Passing rate:

19 Appointed since 1999.

4 Dropped out.

5 Completed studies, were appointed as TDPs then resigned.

3 Completed studies, got trained and currently employed.

3 Completed studies, currently completing vacation work requirements, to be

appointed into the TDP.

3 To complete studies in 2007.

1 To complete in 2008.

9. Auditor General’s Report

The Auditor General report states that the following policies and procedures were not formally approved during the year under review therefore the Committee needs a report on these issues:

A formal information systems change control policy

Data backup and related disaster recovery policy

Logical Access and security policy to control access to the information system


Information systems control policy

The IT policy was reviewed and revised in October / November 2006 to ensure that it addresses the change management questions posed. It was subsequently approved by the Board of Directors in their first meeting of 2007.

Data backup and related disaster recovery policy

The IT policy as approved addresses the question of disaster recovery. In addition, detailed Backup and Restore guidelines have been approved by the management of Armscor.


Logical access and security policy to control access to the information system

Legacy Mainframe Systems – It is not economically feasible to rewrite the legacy mainframe systems to comply with the new logical access and security controls. This requirement is to be addressed as part of the transformation of the application systems of Armscor.

Modern Application Systems – The Information Systems Security Policy has been revised and is going to serve in the April meeting of the Board of Directors.

10. Conclusion and Recommendations

There is a need for Armscor to present to the Committee on the following issues:

R51m saving with regard to Information Technology, Operational Items and Vacancies the Committee feels that this was an under spending.

A small saving of R12m which could not be explained.

A report on the outcome of the suspension of the CEO and how R126m and the R21m respectively was lost

R3.4b unspent money, the Committee needs this unpacked


Under spending of R51mEXPLANATION :

1. PERSONNEL COST Rm

1.1 Vacancies not filled 11,6

- Management Board (General Manager Acquisition and Company Secretary) 1,7

- Acquisition and Quality (Unavailability of highly skilled technical manpower) 9,9

2. ADJUSTMENT OF PROVISION FOR POST RETIREMENT BENEFITS 13,1

The IAS19 (AC116) valuation of the group’s post-employment benefits was carried out at 31 MArch 2006. Based on the latest projection performed at 31 March 2006 the present value of the obligation is R199.4m (2005: R148.3m) and the fair value of assets is R263.2m (2005: R184.3m). Provision is being made for the projected obligation, spread over five years.

3. COMPUTER SERVICES 15,3

A project aimed at moving legacy mainframe applications to client server technology, as well as other technology renewal projects were postponed awaiting completion of the enterprise architecture investigation.

4. SUBSISTENCE AND TRAVEL 5,0

Variance due to rephasing of acquisition projects, requirements not received from the DOD and concerted efforts to reduce subsistence and travelling.


Under spending of R51m

EXPLANATION :

5. CONTRACTOR SERVICE 2,6

Certain maintenance (airconditioner, electrical and building) was carried out by Armscor itself and not contracted for externally as well as provision for legal costs which did not materialise fully (R1.3m).

6. WATER AND ELECTRICITY 1,9

During the previous financial year the Tshwane Metropolitan Authority did not register Armscor’s water usage. The outstanding account as agreed upon, settled in the current financial year, was less than budgeted for.

7. DEPRECIATION 1,0

Rescheduling of Capital Expenditure over a longer term in Armscor Business

TOTAL 50,5


Rm

EXPLANATION:

1. Savings due to concerted efforts to reduce costs 8.8

Postage and telecommunication, stationery, publications and advertisement 4.6

Marketing (Fewer shows facilitated than planned) 1.2

Maintenance on buildings and equipment – Armscor Business 1.5

Various smaller items (social investment, security services, etc.) 1.5

2. Regional Council Services Levies 1,0

Savings are due to the cancellation of Regional Council Services Levies.

3. Rent and Maintenance: equipment 1.0

The variance in car hire was due to rephasing of acquisition projects, requirements not received from the DOD and concerted efforts to reduce subsistence and travelling.

The variance in rent of Photocopy equipment: positive was due to the positivevariance in the rate exchange.

4. Sub Contractors – Armscor Business 2,0

The variation was due to a negative variance in actual sales which resulted in less sub-contracting than budgeted for.

TOTAL 12,8

Small saving of R12m


Report on the outcome of the suspension of the CEO and others

On the 24th February 2005 the Armscor Board of Directors suspended the Chief Executive Officer, Mr Thomo, the General Manager Armscor Business, Dr Jan de Necker and Executive Manager DMD, Mr Boet van Staden, following allegations levelled against them with regards to the marketing of the Ratel to Jordan.

The allegations related to the failure to return the Ratel back to the Department of Defence after the expiry of the temporary export permit. The Board considered the allegations serious enough to warrant an immediate suspension of the three officials pending a full investigation.

The Board engaged the services of the Gobodo Forensic and Investigative Accounting (Pty) Ltd to undertake an investigation of the allegations against the three.

Gobodo Forensic Accounting presented its final report to the Board at a special sitting of the Board on 9 June 2005.



i) The Chief Executive Officer, Mr Sipho Thomo should be absolved of any irregularity in this entire matter and his suspension should be lifted with immediate effect;

ii) The suspension of the General Manager: Armscor Business, Dr Jan de Necker, should be lifted with immediate effect.

iii) The suspension of the Executive Manager: Defence Matériel Disposal, Mr Boet van Staden, should be lifted with immediate effect.

The investigation revealed no evidence of wrong doing or negligence to substantiate the allegations against the three Armscor officials, consequently, the main findings and recommendations of Gobodo were as follows:

After deliberating on these issues, the Board of Directors accepted the above findings and recommendations.



The three Armscor officials were reinstated on 10 June 2005 and resumed their duties on Monday, 13 June 2005.

This matter was reported publicly in the Armscor’s Annual Report, and as such has been fully and satisfactorily concluded.


Country Description Status DOD Action Value (R) Current Status

Jordan Ratel 3LC expired/ Contract terminated Stock list withdrawn 95,700,000 New letter of intent signed

ChileCheetah Aircraft Contract Terminated Stock list withdrawn 3,955,600 Contract Terminated

Polokwane B VehiclesTender Allocated Wait for NCACC approval

Authority not granted 5,955,822

Approvals received and sales continue

Wallmansthal B Vehicles

Tender Allocated Wait for NCACC approval

Authority not granted 10,814,689

Approvals received and sales continue

Gabon Mirage F1 Contract Terminated Stock list withdrawn 40,000,000 Sold

Ghana Rinkals Ministerial ApprovalAuthority not

granted 1,000,000 Await issue instruction

Total Value 157,426,111

DOD 80% 125,940,889

Armscor 20% 31,485,222

Report on the loss of R126m and R21m respectively


Unpacking of R3.4b unspent money

Funds re-phased to 2006/07 on request of the DOD

No requirements from the DOD

A109 LUH 102.933 SAAF Kitty 0.945

Gripen 2.565 Corvettes 291.608

Hawk 190.360 Submarines 79.677

Sub-Total 295.858 Sub-Total 372.230

Rate of Exchange Savings Delay in order placement

Gripen 10.745 Drummer 20.935

Corvettes 117.033

Submarines 94.174

Sub-Total 221.952 Sub-Total 20.935



Non-performance by Contractors

LUH 219.169 Only 7 of 12 planned helicopters delivered

Hawk 532.808Contract amended to allow delivery with incremental functionality

GBADS 243.193 Late delivery by contractor

Casspir Mk III 82.290 Longer than expected industrialization phase

Rooivalk helicopter 71.746Long lead times on spares and problems with Eurocopter accreditation delayed achievement of planned work

UAOVS 23.864Unexpected technical problems during aircraft qualification

Sub-Total 1 173.070

Thank you


5.1 Disposal of SANDF surplus stockArmscor shows a net loss of R7.3m due to moratorium put on stock sales by the NCACC, this is of great concern to the Committee and we need to know what preventative measures are being put in place to prevent this from re-occurring



Background

During 2001 and 2002 the Auditor General and SCOPA raised serious concerns regarding the redundant assets that have not been disposed of

A business plan was drawn up and on 26 September 2002, the Plenary Defence Staff Council approved the implementation of this plan for the disposal of excessive category 1 materiel

• Armscor Business will work on risk and will receive no transfer payment to cover the costs of this function.

• Instead of receiving a transfer payment from the DOD, Armscor Business is allowed to retain 20% of the sales value of stock and the balance will be paid into the account of the DOD.

• The 20% retained income consists of 12.5% to recover operational costs incurred and an incentive in the form of a 7.5% commission.



Function and processes:

The main responsibility of DMD is the management of the warehousing, marketing and sale of disposed redundant and surplus defence materiel of the DOD, as and when the materiel is identified by the DOD.

Such disposal is done to the best possible advantage of the DOD and the State in terms of the Armscor Act as well as the Service Level Agreement between Armscor and the Department of Defence.

The sales process is induced by either a pro-active or reactive action and is executed by means of foreign/local sales, tenders and replacements.



Restrictions placed on DMD:

On 10 March 2005 DMD received a “for information only” copy of a letter sent by the Deputy Director General of the Chief of Acquisitions and Procurement Department to the office of the Chief of Logistics, in which it is stated that all requests received for the disposal of stores by Armscor be frozen until further notice, as well as that DAPD will not authorise Armscor (DMD) to proceed with any new requests for the sale of disposed materiel



Cost drivers:

The operational expenses of the Defence Material Disposal Division

The maintenance, security, personnel and the management of the existing eight warehouses;

The cost of rendering assistance to the Arms of Service during phases 1 to 4 of their disposal investigation, which occurs prior to the stock being made available to DMD.

Conclusion:

A forum between the Secretary for Defence and the CEO of Armscor discuss on a regular basis all stock sales issues.

A forum that includes the Chief of Acquisition, the chief of Logistics and the General Manager: Armscor Business was created to screen all applications before submitting the requests to the NCACC.



FUNDS NOT COMMITTED ON:

LUH ( ECA ) 102.933 Re-fasing of orders and fa's on request of DAPD

GRIPEN ( ECA) 2.565 Re-fasing of orders and fa's on request of DAPD

HAWK (ECA) 190.36 Re-fasing of orders and fa's on request of DAPD

SAAF (KITTY) 945 Unknown funds

CORVETTES (UNKNOWN) 278.568 Unknown funds

CORVETTES (VARIOUS SERIES)

13.042 Surplus funds as requirements not formalised well

SUBMARINES ( LOCAL) 79.677 Surplus funds no requirements

1612.145




NON PERFORMANCE BY CONTRACTORS

LUH 219.169 Only 7 of the 12 helicopters were completed.

GRIPEN 10.745 Savings on ROE and PM.

HAWK 532.808 Mainly due to signature of CO 147 (R409.522m),Invoices not submitted by AB Logistics/BAE Systems,ROE and escalation.

MARITIME HELICOPTER 17.208 Integration Design Review Milestone only achieved 80% on local and overseas orders. Delayed deployment of personnel to UK.

CORVETTES 117.033 Mainly due to ROE and esc.savings against the WDR projections (R76m) together with late contracting as a result of the WDR inputs only approved late in January 2006 (R33m) together with savings on Stat costs and PM

SUBMARINES 94.174 Due to savings on statutory costs(R81m),PM and ROE and escalation savings.

991.137




NON PERFORMANCE BY CONTRACTORS

GBADS 243.193 Mainly due to late delivery by the contractor.

CASSPIR MKIII 82.29 The number of Casspir variants made the industrialisation phase more complicated and the Eng.Data pack had to be updated. The SAPS vehicles, to supplement the total of 174 vehicles required intensive rework to obtain same configuration as the ARMY's

ROOIVALK 71.746 Long lead times on spares and repair(Batch orders 1to7) and accreditation req.from Eurocopter to enable DAS to execute and complete work in progress on the dynamic components of the Rooivalk (gearbox and drive train elements).




UNMANNED AERIAL OBSERVATION SYSTEM

23.864 Non performance and penalties imposed on contractor.

DRUMMER 20.935 Due to accreditation problems on the original RFO, DAFA suggested that there must be two orders, thus delaying the placement of the orders.

UNDER R10m

442.028

3045.31 PLEASE REFER TO PAGE 54 THIRD LAST PARAGRAPH

issues eminating from armscor’s annual report for the 2005 / 2006 financial year

Documents

annual report of armscor

armscor processes

hr management

scope management

cost management

registry management

reskilling needs

technology management