ISSUES%20EMINATING%20FROM%20ARMSCOR

1
ISSUES EMINATING FROMARMSCORS ANNUAL REPORTFOR
THE 2005 / 2006 FINANCIAL YEAR

• Presented to the
• Portfolio Committee on Defence
• 13 MARCH 2007

2
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.

3
Issues from Armscors 2005/2006 Annual Report

• Armscor Group Operational Budget 2005 / 2006
• 4 Performance against Acquisition goals
• SANDF Operational Support
• Manage DOD Strategic Facilities
• Transformation Challenges
• Risk due to insufficient funding for Armscor
• Auditor Generals Report
• Conclusion and Recommendations

4
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

5
Briefing on reskilling of Armscor employees

• Staff categories in Armscor.
• Critical enabling competencies.
• Service delivery application / domain area.
• Concerns / issues.
• Interventions.

6
Briefing on reskilling of Armscor employees
Staff categories in Armscor

• 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.

7
Briefing on reskilling of Armscor employees
Critical enabling competencies

• 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.).

8
Briefing on reskilling of Armscor employees
Service delivery application / domain area

• 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.)

9
Briefing on reskilling of Armscor employees
Concerns / Issues

• 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.

10
Briefing on reskilling of Armscor employees
Interventions

• 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.

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Replacement of the main frame and technology
renewal
Replacement of the main frame

• 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

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Replacement of the main frame and technology
renewal
Replacement of the main frame

• The Mainframe running costs are high in
  comparison with client server platforms.
• The database systems, programming languages are
  outdated
• Outdated 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.

13
Replacement of the main frame and technology
renewal
Replacement of the main frame
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.

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Replacement of the main frame and technology
renewal
Capital renewal

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

Item Replacement Cycle
Desktops / Laptops / Palmtops / Pocket PC / Tablet PC 3
Printers 5
Servers 3
Networking equipment 5
Cabling 7

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Replacement of the main frame and technology
renewal
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.

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Replacement of the main frame and technology
renewal
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

17
Replacement of the main frame and technology
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.

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Replacement of the main frame and technology
renewal
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

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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.

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Why Armscor spend 72 of its budget on salaries
Operational budget for 2005/06
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
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Why Armscor spend 72 of its budget on salaries
Operational investment / requirements of Armscor

• 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
  Armscors operational environment demands high
  level personnel in the technical functional
  disciplines which leads to a staff profile as
  indicated on the following slides.

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Why Armscor spend 72 of its budget on salaries
Occupational Levels
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
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Why Armscor spend 72 of its budget on salaries
Staff / skill profile
AFRICAN COLOURED INDIAN WHITE TOTAL OVERALL TOTAL
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
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Why Armscor spend 72 of its budget on salaries

• 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.

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4. Performance against Acquisition goals

• 4.1 Maritime Defence Strategic Defence Packages
• The 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 Packages
• Only 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 corrected
• The 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 Packages
• The 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 completed
• The 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

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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.

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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.

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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.

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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.

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4.3 Landward Defence Strategic Defence Packages
Delay due to affordability program of the new
generation light infantry vehicle

• 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.

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4.3 Landward Defence Strategic Defence Packages
Delay due to affordability program of the new
generation light infantry vehicle

• 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.

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4.3 Landward Defence Strategic Defence Packages
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)

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4.3 Landward Defence Strategic Defence Packages
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

34
4.3 Landward Defence Strategic Defence Packages
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

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5. SANDF Operational Support

• 5.1 Disposal of SANDF surplus stock
• Armscor 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

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5. SANDF Operational Support
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.

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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

38
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.

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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

40
7. Transformation Challenges
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.

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7. Transformation Challenges
Measures to stop the loss of personnel due to
salaries and limited growth career opportunities

• 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.

42
7. Transformation Challenges
Measures to stop the loss of personnel due to
salaries and limited growth career opportunities

• Limited career growth opportunities
• Broad Banding in order to promote a more flexible
  utilisation of employees. gt 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.

43
7. Transformation Challenges
Measures to stop the loss of personnel due to
salaries and limited growth career opportunities

• 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.)

44
7. Transformation Challenges
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.

45
7. Transformation Challenges
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.

46
7. Transformation Challenges
Transformation and Equity Policy Employee
statistics for STS
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
27.7 Female
78.2 Male
72.3 Male
47
7. Transformation Challenges
Transformation and Equity Policy Employee
statistics for STS
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 23.4
Black 7.7
White 92.3
White 76.6
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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?

49
8. Risks due to insufficient funding
Armscors 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 organisations financial resources.

50
8. Risks due to insufficient funding
Armscors 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.

51
8. Risks due to insufficient funding
Armscors bursary scheme

• Entrance requirements
• In order to be eligible to participate,
  applicants must-
• Have completed Grade 12 with University
  exemption.
• Be in or have already written and passed their
  first year
• Have expressed interest in a career within the
  defence industry
• Be willing to become employed in Armscor.
• Be able to obtain and retain the required
  positive security clearance.
• Have relevant subjects to enable them to be
  employed in Armscor.

52
8. Risks due to insufficient funding
Armscors bursary scheme

• 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.

53
8. Risks due to insufficient funding
Armscors bursary scheme

• 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.

54
9. Auditor Generals 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

55
9. Auditor Generals Report
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.

56
9. Auditor Generals Report
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.

57
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

58
10. Conclusion and Recommendations
Under spending of R51m
EXPLANATION
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 groups 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.

59
10. Conclusion and Recommendations
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 Armscors 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

60
10. Conclusion and Recommendations
Small saving of R12m
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 positive variance 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
61
10. Conclusion and Recommendations
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.

62
10. Conclusion and Recommendations
Report on the outcome of the suspension of the
CEO and others
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

• 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
• 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.

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

63
10. Conclusion and Recommendations
Report on the outcome of the suspension of the
CEO and others
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 Armscors Annual Report, and as such has been
fully and satisfactorily concluded.
64
10. Conclusion and Recommendations
Report on the loss of R126m and R21m respectively
Country Description Status DOD Action Value (R) Current Status
Jordan Ratel 3 LC expired/ Contract terminated Stock list withdrawn 95,700,000 New letter of intent signed
Chile Cheetah Aircraft Contract Terminated Stock list withdrawn 3,955,600 Contract Terminated
Polokwane B Vehicles Tender 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 Approval Authority not granted 1,000,000 Await issue instruction
  Total Value 157,426,111      
  DOD 80 125,940,889      
      Armscor 20 31,485,222      

65
10. Conclusion and Recommendations
Unpacking of R3.4b unspent money
Funds re-phased to 2006/07 on request of the DOD Funds re-phased to 2006/07 on request of the DOD No requirements from 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 Rate of Exchange Savings Delay in order placement Delay in order placement
Gripen 10.745 Drummer 20.935
Corvettes 117.033
Submarines 94.174
Sub-Total 221.952 Sub-Total 20.935

66
10. Conclusion and Recommendations
Unpacking of R3.4b unspent money
Non-performance by Contractors Non-performance by Contractors Non-performance by Contractors
LUH 219.169 Only 7 of 12 planned helicopters delivered
Hawk 532.808 Contract 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 71.746 Long lead times on spares and problems with Eurocopter accreditation delayed achievement of planned work
UAOVS 23.864 Unexpected technical problems during aircraft qualification
Sub-Total 1 173.070

67
Thank you

68
5. SANDF Operational Support

• 5.1 Disposal of SANDF surplus stock
• Armscor 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

69
5. SANDF Operational Support
Preventative measures to combat re-occurrence of
moratorium

• 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.

70
5. SANDF Operational Support
Preventative measures to combat re-occurrence of
moratorium

• 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.

71
5. SANDF Operational Support
Preventative measures to combat re-occurrence of
moratorium

• 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

72
5. SANDF Operational Support
Preventative measures to combat re-occurrence of
moratorium

• 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.

73
10. Conclusion and Recommendations
Unpacking of R3.4b unspent money
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


74
10. Conclusion and Recommendations
Unpacking of R3.4b unspent money
FUNDS NOT COMMITTED ON
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  
   

75
10. Conclusion and Recommendations
Unpacking of R3.4b unspent money
FUNDS NOT COMMITTED ON
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).


76
10. Conclusion and Recommendations
Unpacking of R3.4b unspent money
FUNDS NOT COMMITTED ON
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