ARMSCOR's 2002-2003 Annual Report

Meeting report

DEFENCE PORTFOLIO COMMITTEE
2 September 2003
ARMSCOR ANNUAL REPORT; FORCE STRUCTURE AFFORDABILITY AND SUSTAINABILITY: BRIEFING

Chairperson: Mr T. Modise (ANC)

Document handed out:
ARMSCOR's 2002 -2003 Annual Report

ARMSCOR website

Representatives: Mr J. Masilela, Secretary of Defence; Mr F. Titi, Chairperson of Armscor; Mr H. Thomo, Chief Executive Officer, Armscor

SUMMARY
The presentation of Armscor's 2002/2003 annual report was followed by discussions, including Armscor's application for an increase in the transfer payment made by the Department of Defence. The report notes total assets of R535.9 million, and a surplus of R31 million in the past financial year.

The briefing on Force Structure - its affordability and sustainability, was declared closed to the public.

MINUTES
Mr Titi in his address noted the following:
The four challenges that face Armscor are:
- Transformation of staff
- Black economic empowerment
- Funding
- Industrial participation.

There has been movement toward passage of the new Armscor Bill which will give cognisance to Armscor's continued existence and purpose. Armscor's financial performance is derived from the R209 million transfer payment from the Department of Defence. Further revenues of R390 million result from sales generated by subsidiaries and R276 million from the disposal of the Department of Defence's surplus stocks.

Armscor has experienced an operating deficit of R65 million over the past two years, and cannot continue to operate on this basis. The Department of Defence (DoD) is aware of the problems. The net profit of R31 million stemmed from finance income rather than operations.

Mr Thomo commented on the following:
The reasons for Armscor's existence are:
- To acquire and procure defence materiel for the DoD
- Quality assurance and capability in support of acquisitions
- Dispose of excess, redundant and surplus materiel for the DoD
- To support defence industrial capabilities
- To support state organisations with their acquisition requirements.

He referred to Armscor's funding problems:
- The transfer payment is too low. It was reduced by 15% in 1998, and has since been increased by only 4 to 5% per annum.
- Employee salaries lag the market.
- Increased resignations, mostly engineers and scientists who are easily enticed elsewhere.
- Erosion of technical capabilities.
- Inability to transform workforce.

"We are responsible for the defence packages, yet we don't have adequate resources to meet that responsibility."

Future Strategies:
- Sweating Armscor's assets*, such as facilities at Alkantpan to be used to generate income.
- Singapore and other countries will use space in South Africa to test their defence equipment.
- Technology commercialisation.
- Management of Simon's Town Navy Dockyard with commercial work to supplement income.
- Management of DoD outsourcing functions stemming from staff losses in SANDF.
- Acquisition services for SADC and African Union.

* Armscor assets include: Alkantpan, Gerotek, Protechnik, Haznat, Armour Development, Ergotech, Crypology, Defence Research Centre, Genman, Flamengro, AB Logistics (microfreight).

Armscor is being modelled after the UK Ministry of Defence acquisition services. This will include commercial development of military technologies for the economic benefit of South Africa, including black empowerment possibilities.

Questions:
Schmidt (DA): Given resignation of engineers, is Armscor still functional?
Thomo: Thin on the ground, but we are looking for black engineers in South Africa and need 47 over the next 3 years. We also need the funding to employ them.
Blaas (NNP): How does Armscor profit from disposal of surplus materiel?
Thomo: The DoD holds too much excess stock. Armscor takes a 7.5% commission for selling this, and disposed of R237.5 million of stock for R276.2 million.
Blaas (NNP): Follow-up -- that margin is more than 7.5%
Thomo: There is another 12.5% that is paid into reserves.
Jankielsohn (DA): When will ADS fit the combat suite into the first corvette? What percentage of personnel costs is paid to the directors listed on page 79? What about a bursary programme? And what is the situation regarding the ammunition disposal plant?
Thomo: Subject to approval of the Defence Secretariat, Armscor will operate the ammunition disposal plant. There is a two year bursary scheme. Salaries of directors amount to 2.9% of total salaries. The first corvette will be delivered in December when ADS will begin to fit the combat suite.
Schmidt (DA): By how much do you need an increase in the transfer payment in order to recruit 47 engineers?
Thomo: We are seeking an increase of R32 million.
Masilela: We will consider this in two weeks' time. The Minister has agreed in principle.
Modise (Chair): We would like to be informed about this before we debate the Armscor Bill. We also want to know about the additional 12.5% commissions on disposal of surplus stocks.

The meeting was adjourned.