ARMSCOR PRESENTATION

Acting CEO: Mr Sipho Mkwanazi

30 JUNE 2011

SCOPE 1. Aim

2. Background

1. Governance

2. Structure

3. Strategic Focus

1) Funding and Growth

2) People / Capabilities

3) Broad Based Black Economic Empowerment (BBBEE)

4) Stakeholder Relationships

5) Support Local Industry

6) Operational Efficiencies

4. Corporate Performance

Corporate Goals against Actual

Finance

5. Challenges

1) Reposition of Armscor

2) The appointment process of the CEO

3) Cancelled A400M Airbus project and alternatives being considered

4) Funding challenges of the Corporation

5) Litigation matters

1. AIM

To give a background of Armscor , strategic plan , performance and the challenges of the organisation.

2. Background

STRUCTURE OF THE MINISTRY OF DEFENCE AND MILITARY VETERANS

Minister of Defence and Military Veterans

Deputy Minister of Defence and Military Veterans

DEPARTMENT OF MILITARY VETERANS

ARMSCOR

Chairman of Armscor

Armscor Board of Directors

Armaments Corporation of

South Africa (Ltd)

DEPARTMENT OF DEFENCE

Secretary for Defence

Chief of the SANDF

Services and Divisions

Director-General

Services and Divisions

Positioning of Armscor

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Governance

Statutory Corporation – Act No 51 of 2003

Governed and Controlled by a Board of Directors- Accounting Authority of Armscor

- Defence Matériel Tender Board

Schedule 2 Public Entity in terms of PFMA- Annual Shareholders compact (Sec 29.2 – mandated

key performance measures and indicators as agreed with executive authority)

- 3 Year Corporate Plan (Sec 29.1 – strategic objectives, key performance areas, risk management, financial plan, etc.)

- Quarterly progress reports

Designated Acquisition Agency for the DOD

Service Level Agreement with Department of Defence

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Armscor Mandate

The Armaments Corporation of South Africa, Limited, Act No 51 of 2003 states the functions of Armscor as :

Acquire defence materiél on behalf of the DOD

Manage technology projects as required by the DOD

Provide for a quality assurance capability

Establish a system for tender and contract management

Dispose of redundant , excess or forfeited defence materiél

Establish a compliance administration system

Support and maintain such strategic and essential defence industrial capabilities, resources and technologies as identified by the DOD

Provide Defence operational research

Establish a Defence Industrial Participation programme management system

Provide marketing support to defence-related industries

Manage facilities identified as strategic by the DOD

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Execution of Armscor Mandate

Acquire defence materiél on behalf of the DOD

Manage technology projects as required by the DOD

Provide for a quality assurance capability

Establish a system for tender and contract management

Dispose of redundant , excess or forfeited defence materiél

Establish a compliance administration system

Establish a Defence Industrial Participation programme management system

Provide marketing support to defence-related industries

Support and maintain such strategic and essential defence industrial capabilities, resources and technologies as identified by the DOD

Provide Defence Operational Research

Manage facilities identified as strategic by the DOD

Manage Dockyard as a strategic facility

Provide essential maintenance services to the SA Navy fleet.

ArmscorDefence Institutes

ArmscorDefence InstitutesArmscorArmscor

ArmscorDockyardArmscorDockyard

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3. STRATEGIC FOCUS

Armscor’s strategic objectives seeks to address the following areas:

● Funding and growth ● People and capabilities ● BBBEE empowerment ● Stakeholder relations● Local industry support ● Operational efficiency

(will be reviewed by the Board of Director’s in July)

Armscor Group – Strategic Priorities

Objectives set to measure the achievement as well as Service Level Agreement execution

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Strategic Initiative 1: FUNDING AND GROWTH

Challenge: Insufficient funds to execute mandate

How the strategy seeks to address the challenge

Cost management ( Costing required services and capabilities)

Growth and income generation (Exploit commercial opportunities)

1.Developing a Cost Model & implementing the model

Interim cost model developed used as a predictor of required capacity and funding.

Cost model to be completed by 2011.

2.Dockyard

Operationalisation of Dockyard and exploiting commercialisation opportunities

Strategy developed and business plan is being developed.

Challenges:

Loss / Erosion of Skills (Retirement, resignation, demotivation, & lack of talent attraction)

How the strategy seeks to address the strategic gap

Human Resource Strategy (Attraction of skills, Development & Training, Skills retention, Employee satisfaction, succession plan, Skills transferring programs.)

1. Human Resources Strategy to focus on the following:

To position ARMSCOR as an employer of choice

To create a positive organisational culture

Transformation including affirmative action and EE

Manpower planning (Succession / Talent)

Remuneration Management

Skills Development

Build sound employee relations

Organisational wellness

Strategic Initiative 2: PEOPLE / CAPABILITIES

Challenge: Insufficient transformation in ARMSCOR & Defence industry (BBBEE Compliance)

How the objective seeks to address the strategic gap

Develop a Broad Based Black Economic Empowerment [BBBEE] Strategy in line with the DOD policy

Implement BBBEE strategy

Transform ARMSCOR BEE (Internal compliance)

Transform Defence Industry BEE (External compliance, suppliers)

Strategy developed and approved by the Boardo Verification of ARMSCOR BBBEE level done and is at level 6o Benchmarked similar organisations and analysis done for required

actions for ARMSCOR to achieve BBBEE level 4.o For industry BBBEE strategy is being implemented

Strategic Initiative 3: BROAD BASED BLACK ECONOMIC EMPOWERMENT (BBBEE)

Challenge:Negative perceptions about ARMSCOR due to poor stakeholders relations and negative image.

How the strategy seeks to address the problemAppoint stakeholder relations manager, Identify all stakeholders, revisit/review strategy of stake holder engagement to manage relationships / improve reputation and ensure compliance

Identified stakeholdersMinistry of Defence (DOD)ParliamentDefence SecretariatSA National Defence Force (SANDF)IndustryBoard of DirectorsEmployeesOrganised LabourMediaRegulatory Bodies and Treasury

Stakeholder relations Manager appointedReview strategy and develop a divisional structure

Strategic Initiative 4: STAKEHOLDER RELATIONS

Challenge:

Sustainability of local capability, and lack of local industry support (Support Government Initiatives: Economic development, Job creation & Transformation)

How the objective seeks to address the strategic gap

Clarify with industry what support they require from ARMSCOR

Support local industry where possible by developing a Defence Sector industry Strategy

Implement the strategy

Integrated strategy is being developed.

Industry is being supported on exports through exhibitions and Defence Committees

Strategic Initiative 5: LOCAL INDUSTRY SUPPORT

Challenge:

Operational Inefficiencies (Outdated equipment IT systems, lack of alignment, integration and efficiency measurements)

How the objective seeks to address the strategic gap

Improve Productivity, Efficiencies and Integration Productivity

o Productivity management system is being developed

IM/IT Strategic Plan o Revisited the IT Strategy o Short term actions implemented o Benchmarking of similar organisations is being done

ARMSCOR Calendar has been developedo implemented to achieve a more integrated

organisation

Strategic Initiative 6: OPERATIONAL EFFICIENCIES

4. CORPORATE PERFORMANCE

CORPORATE PERFORMANCE

PERFORMANCE

Preliminary report: Auditing not completed

Corporate Goals: Most of the Corporate Goals were achieved or exceeded

Finance: Organisation realised a surplus of R 17 million

Projects: o All the SDP projects performed well, now focussing on final

deliveries and operational tests and evaluationso Airbus A400M project was terminatedo Other Special Defence Account Projects performed well while

progress were made with GBADS and Rooivalk Projects that experienced delays

Finance

ARMSCOR GROUP – 2010/11FINANCIAL OVERVIEW

Auditing not complete

Total revenue increased with 10.9% to R 1 888 million

Net asset value (Shareholder’s interest) increased with 3.2% to R553.7 million due to surplus realised

Capital investment of R43.6 million (includes transfer of Dockyard moveable assets) to maintain operations consisting of computer equipment, machinery and facilities

Employee related costs remains highest cost driver – 75%

ARMSCOR 2011/12 Financial Overview

2011/12 BudgetTotal Armscor Operating Budget 932 492 505 - Transfer Payment (720 062 750) - Other Income (187 394 395) - Shortfall 25 035 360

STRATEGIC FOCUS

ACTIVITIES TO ADDRESS FUNDING

Efficiency savings exerciseReviewing expenditure and processes to ensure available funding is spend on service delivery

Funding modelCosting of functions to substantiate funding required to perform mandated functions

Update and review of Service Level Agreement

CEO APPOINTMENT PROCESS

1. New Board to be appointed

2. Process to be finalised by the new Board of Directors

3. The successful candidate will be recommended to the Minister as a

shareholder

AIRBUS A400M

Status Feedback

A400M Contract Termination

5. November 2009 contract terminated

6. Prepaid payments due to Armscor in January 2010-

7. Several meetings with Airbus demanding payments

8. Challenges and delays: Disputing right of termination Linking purchase contract to offset contract Schedule payments Contract requirements Schedule payments

Programme Update

4 Oct 2010 - AMSL and ARMSCOR agreed on the following:

ARMSCOR to present the proposed unconditional repayment schedule to the ARMSCOR Board of Directors ARMSCOR to propose a contract agreement amendment to effect the above

Sensitive classified documents held by either party to be returned to the originating party.

Proposed Repayment Schedule

1. Agreed on five scheduled payments from January 2011 to December 2012.

2. Interest will accrue to ARMSCOR from 05 Jan 2010 to date of payment

3. Airbus sent a letter still linking two contracts (Purchase and Offset)

4. Letter of demand sent by Armscor demanding payment within 15 days

1. Agreed on five scheduled payments from January 2011 to December 2012.

2. Interest will accrue to ARMSCOR from 05 Jan 2010 to date of payment

3. Airbus sent a letter still linking two contracts (Purchase and Offset)

4. Letter of demand sent by Armscor demanding payment within 15 days

HEAVY AIR LIFT CAPABILITY

1. The existence of requirement was confirmed before cancellation.

2. Alternatives were considered for short term provision of the capability

3. Long term strategy was agreed to:

Review of the requirement by SAAF

Approved requirement to follow the process of acquisition.

Funding Challenges

Funding challenges of the Corporation

Challenge:

Inadequate funding

1. Acquisition: Insufficient funding of required capability

Action Plan

Acquisition Value chain developed

Cost model being developed

ARMSCOR & DOD jointly finalising more detailed SLA

To agree on appropriate funding model

Improving efficiency to realise cost saving opportunities.

Funding challenges of the Corporation

2. Dockyard

SA Navy capability required needs additional funding

Required Capability Analysis completed

Renewal of facilities

Increase human resources required

Action Plano Engaged Chief of Navy, SecDef o The additional funding requirements included in Treasury funding

requirements

3. ARMSCOR Defence Institutes

Action Plan

Required Capability Analysis completed

Strategy formulated to achieve breakeven

Funding Model revised

Litigation Matters

1. Breach of contract pertaining Value added Tax

ARMSCOR approached SARS for a ruling as to whether Input VAT on Special Defence Account could be claimed.

SARS ruled that ARMSCOR cannot claim Input VAT on SDA.

ARMSCOR is awaiting response from Gobodo on the ruling.

2. Civil Court in Lisbon (Beverly Securities)

A claim for commission based on an agency relationship from a transaction that happened in 1980s

Preliminary hearing is scheduled was heard then awaiting the hearing

Repositioning of Armscor

Repositioning of Armscor

1. New Armscor Board of Directors appointed

2. A strategic session is planned for 14-15 July 2011

THANK YOUTHANK YOU