Armscor & Castle Control Board 2020/21 Annual Performance Plans

Meeting report

The Chairperson said the Castle Control Board (CCB) presentation should also address the reasons for its request for extra funds, and what the outcomes from the use of the money would be.

Briefing by Castle Control Board (CCB)
Mr Calvyn Gilfellan, Chief Executive Officer (CEO), CCB, said that with the advent of Covid-19, it was not business as usual at the entity. It had closed in the middle of March and that was the last income it had received. It had enough of a surplus to pay staff for March, but for April only enough to pay junior staff 70% of their wages. He had engaged with the Unemployment Insurance Fund (UIF) for the remaining 30%. None of the senior management had been paid. When the Castle was closed, it had lost the hosting of six major events that would have accrued R500 000, and as the Castle was in the tourism and museum industry, it would be opened only once the lockdown reached level 2. The CCB had informed the Minister and had put together a R1.6m relief package which the Secretary of Defence, amongst others, had supported. This had been sent to Treasury.

He moved on to describe the CCB’s strategic plan, which he said was aligned to national imperatives, including heritage prescripts. The Castle was being transformed and showcased as a shared heritage. The CCB had four programmes -- administration, conservation management, tourism and public access, and had a total budget of R8.9m before Covid-19. He referred to an amended budget of R5.2m should the Castle be able to open in August, but as tourism sites were among the last to be opened, the R5.2m budget would have to be reworked. 

Mr Mandla Ngewu, Chief Financial Officer (CFO), CCB, took over the presentation and addressed the human resources (HR) issues of the CCB. He said it was important for now to save the lower level staff jobs, and senior management had foregone their salaries. The lower level staff were paid only 70% of their salaries for April. The CCB was still awaiting a decision by Treasury on the CCB’s request for R1.6m in funding to cover the salaries until August, which in any case did not appear to be the case, as it was more likely to open even later than that.

(See presentation)

Discussion
Inkosi R Cebekhulu (IFP) asked if the staff of the Castle did not qualify for UIF because of Covid-19.

The Chairperson said the CCB had clarified that the Castle paid 70% of the salaries of lower level staff, and it had approached the UIF for the remaining 30%.

Mr M Shelembe (DA) asked if there were no other sources of funds the CCB could approach if its request to the Treasury was not acceded to, otherwise what would happen to the Castle’s operations?

The Chairperson wanted to know how the Castle’s assets were being sweated to generate revenue.

Mr T Mmutle (ANC) said the Auditor General (AG) had been warning about the financial health of the CCB, and over a number of years there had been indications that it would not remain sustainable. To what extent would the Department of Defence play a role in addressing its sustainability issue?
 
Mr Ngewu replied that the CCB had engaged with the UIF to pay the remaining 30% of the lower level staff’s salaries, and that going forward the UIF would have to pay what it could, up to a maximum of R6 000.

On the Castle’s assets being sweated, this all depended on visitors to the Castle and on other assets, such as conference facilities. The Castle could start sweating assets at levels 1 and 2. It had lost out on ten planned events that would have generated a lot of revenue.

He said the sustainability of the Castle’s operations had been highlighted since 2016. It had made a surplus, but a Treasury directive had said that the surplus had to be used on CCB projects. Revenue generation depended on visitors and events.

The Chairperson asked what the statement that “the R1.6m request was still sitting with the Chairperson” meant.

Mr Gilfellan said that the submission was with Treasury, and the CFO followed up on the matter up daily. If the R1.6m was not forthcoming from Treasury, then the CCB could fully apply to the UIF, as it already had a memorandum of agreement with the UIF. The CCB was in limbo because there had been no response from the Treasury.

On the sustainability issue, he said that when Treasury had given an instruction that the surplus could not be kept but had to be invested in projects, it had made the CCB vulnerable. Hence the request had been made for a cushion from the effects of Covid-19 on the organisation, to carry it through. Treasury needed to take a decision, otherwise the CCB would have to tell staff that they were out of temporary or permanent employment.

The Chairperson commented that the R1.6m request was based on a return to business in August, but this was more likely to occur in December.

Mr Gilfellan said the CCB request had been made on 29 March when there had been no pronouncement on Covid levels, so the CCB would need R3.2m if it opened in December.

The Chairperson said the Committee needed to meet with the Minister on the issue of the sustainability of the CCB, which had to be addressed going forward, and also to give the entity some financial support in the short term.

Mr Mmutle raised the possibility of accessing the R4.5b allocation to the Department of Defence (DOD) to assist the Castle. A second possibility was seeing to what extent the Department of Tourism could assist, given that the Castle was a tourist attraction.

The Chairperson said that the Committee needed to meet with the Minister on the issue of the CCB’s sustainability on the one hand, and on how the CCB could be assisted in the short term, including the possibility of the Department of Tourism assisting, on the other hand.


Briefing by Armscor

Mr Malusi Motimele, Acting Chairperson, Armscor Board, said that the Board, in consultation with the Minister, had appointed the CEO on a fulltime basis as from February. The terms of office of six members of the Board were due to come to an end in April, and the Minister, after consultation and because of Covid-19, had reappointed these members temporarily for a period of six months, until October. The Board was proud to inform the Committee on Armscor’s active participation in fighting Covid-19. He asked the Committee to support the turnaround strategy initiatives of revenue generation and government to government business, and the implementation of the Defence Sector Charter to empower local entrepreneurs, contractors and military veterans.

Adv Solomzi Mbada, CEO, Armscor, said the entity had collaborated with the DoD in the sphere of personal protective equipment (PPE) and sanitising products as part of a team comprising other state entities and departments such as the Department of Trade and Industry and the Gauteng Department of Roads and Transport.

He said Armscor’s corporate plan was a continuation of the turnaround strategy work of five to six years ago. There had been no need to disband the current strategy, but only to look at specific areas such as revenue generation. Regarding the budget, the Board had indicated its concern at the number of vacancies. There was a service level agreement with the DOD, and Armscor was evaluated on a quarterly basis. Key goals were contract placement, contractual agreements and scheduled order placements. The strategic plan overview was in alignment with the medium term strategic framework’s (MTSF’s) goals, tools and outcomes. On strategic outputs, he said the goal was to generate additional realisable revenue; to reduce costs while maintaining its current capability; to have efficient and effective delivery through reduced turnaround times; and develop long lasting relationships with key stakeholders.

The organisation’s vision and mission had changed. The new vision was to be the strategic partner of choice for defence and security solutions, and the new mission was to meet the defence material, technology requirements, and the management of the strategic capabilities of the DOD, organs of state and other entities. He referred to the strategic research and development (R&D) facilities of Armscor and the various initiatives for these research facilities, among which were a shark repellent and an ultrasonic broken rail detector.

Describing progress with the implementation of the Economic Recovery Programme (ERP) plan, he said that Armscor was at the point of sourcing a solution. The HR transformation goal of 78% had been exceeded, reaching 82.97% and there had been women’s empowerment development initiatives. 1 220 bursaries had been awarded. The age profile of Armscor was looking healthier than that of previous years, when it had been skewed towards the older age groups.

Armscor’s education outreach programme had a presence in all the provinces except the Free State. The pandemic had shown the reality of the inequalities in education. Armscor’s classes, normally held on a Saturday, were now not viable, whereas certain schools could continue with work online.

Providing a financial overview, Mr Mbada said Armscor was financed mainly through income appropriated by Parliament and received via the DOD budget, which made up 76% of its budget, while 16% came from commercial services rendered. The main expenditure was personnel-related expenditure (77%). The financial challenges were:

The generation of new revenue streams was slower than anticipated and projections had been reduced;
The funding received through appropriation from Parliament was not sufficient to maintain strategic facilities managed by R&D;
Commercial revenue generated by the strategic facilities to supplement the allocation continued to be under pressure due to the lower operating activities of major customers;
The planned revenue for the facilities would be negatively impacted by the coronavirus epidemic, at a cost of approximately R40m;
Personnel-related expenditure -- the main expenditure -- increased at a higher rate than revenue increased;
A significant shortfall of around R100m had been experienced in the post-retirement medical liability for dockyard employees belonging mainly to the Government Employees Medical Scheme (GEMS).

He said the declining budgets and transfer payments to Armscor from Government remained a huge risk towards the future sustainability of Armscor. The allocation did not cover the personnel costs. The strategic facilities that were managed were also under-funded.

Discussion

Mr J Maake (ANC) asked if Armscor had the capability to produce ventilators and screening equipment en masse in the fight against Coivid-19.

The Chairperson said he had been in a meeting with the DOD on Covid-19, which included the setting up of field hospitals with specialised equipment. What was Armscor’s role, and had they been consulted?

Mr S Marais (DA) asked about Projects Biro, Hotel and Hoefyster, saying that they appeared to be in a bad state. What was Armscor’s situation on this procurement? He wanted to know about Armscor’s austerity measures, as large bonuses running into millions of rands had been paid out in the previous year. What would Armscor’s commitment to austerity measures be in the coming year, given that its revenue was restricted? What justification was there for the bonuses, and what bonus principles would be used this year? Referring to R&D, he said that the country had the Council for Scientific and Industrial Research (CSIR), so Armscor had to be cautious not to duplicate services. How would this be ensured?

Ms A Beukes (ANC) referred to the empowering of local entrepreneurs and military veterans, and asked what mode of advertising Armscor was using to be effective in being inclusive. On the 251 women in learning and development programmes, she asked what the motivation for women to take part in these initiatives was, such as promotion. She said Armscor had to take its corporate social investment (CSI) outreach programmes to rural areas like Namaqualand. 

Mr Mmutle asked what criteria were being used to select schools in the outreach programme, as it appeared that they were targeting science schools, but not vulnerable schools in rural areas which were not necessarily science schools.

The Chairperson said there had been reports in the media that the South African National Defence Force (SANDF) had been supplied with PPE that was not up to standard. The Secretary of Defence had said there was no truth to the statement, however. Did Armscor know anything about this, as Armscor’s name had been bandied about, though it was not implicated?

On the issue of ventilators, Adv Mbada said that Armscor had supplied 3D printers to Denel.

On the CSI outreach programmes, he said most of the schools Armscor supported were either farm schools or schools in villages. The challenge was that while one sometimes encountered active Department of Education officials, in other instances the officials were not so active. Armscor always strove to cater for rural areas, and he took note of the suggestion referring to the Namaqualand area.

Regarding the PPE supplied to SANDF, Armscor had been requested to test samples of PPE received from prospective suppliers. On the basis of those tests on masks and sanitisers, orders had not been placed with suppliers whose products failed the tests.

Mr Sipho Mkwanazi, Acting Group Executive: Acquisition and Supply Chain Management (SCM), Armscor, said the team working on ventilators was headed by Denel, and some Armscor engineers had been seconded to the team.

On plans to fight Covid-19, he said Armscor was involved in the procurement of PPE for the SANDF and for other arms of the service.

Regarding the provision of field hospitals, some projects that Armscor had already been running had been fast tracked so that they could be completed quicker. Armscor was also involved with the supply of beds, test kits and other equipment.

Projects Biro and Hotel were running well and were on schedule, but suppliers had informed Armscor that there would be delays because of Covid-19, and this would have an impact on the projects’ budgets, which had been insufficiently budgeted for in the first instance. The delays would incur escalation costs and worsen the budget challenges. Project Hoefyster was already affected by problems Denel was encountering, which had led to delays, and Covid-19 would lead to a worsening situation.

Referring to the mode of advertising, he said the platform used by Armscor’s supply chain was the central data system of Treasury, but because of the nature of Armscor’s work, where classified requirements were involved, it had received an exemption to use its own platform called the “Armscor Bulletin.”

Mr Johann Grobler, CFO, Armscor, responding on the entity’s financial challenges and austerity measures, , said Armscor was trying to reduce its subsistence and travel costs, which were the biggest expenditures after personnel costs. It was also looking to reducing its printing and personnel costs, and would keep on looking to reduce specific costs through efficiencies.

On the bonus structure, an Armscor official said the bonus amounts were based on approved provisions and followed proper governance structures. The amounts were audited and approved by the Auditor-General, and were not exorbitant.

Prof Noel Mkaza, Group Executive: Research and Development, Armscor, commented on the test kits and Armscor’s response to Covid-19, and said that the chemical and biological warfare facility of Armscor had the capability and would proceed to conduct these tests. The focus would be on servicing the armed forces before expanding to other areas. They were experiencing a challenge, because the test kits were stuck at customs. This was where Armscor could make a contribution in the fight against Covid-19.

On R&D and the CSIR, and the issue of duplication and how funding was allocated, he could assure the Committee that there was no duplication. Both entities’ R&D were funded by the DOD, and they were not focused on the same capabilities, so there was no duplication and no chance of duplication occurring.

The meeting was adjourned.