ARMSCOR PRESENTATION Acting CEO: Mr Sipho Mkwanazi 30 JUNE 2011

1. ARMSCOR PRESENTATION Acting CEO: Mr Sipho Mkwanazi30 JUNE 2011

2. SCOPE Aim Background Governance Structure Strategic Focus Funding and Growth People / Capabilities Broad Based Black Economic Empowerment (BBBEE) Stakeholder Relationships Support Local Industry Operational Efficiencies Corporate Performance Corporate Goals against Actual Finance Challenges Reposition of Armscor The appointment process of the CEO Cancelled A400M Airbus project and alternatives being considered Funding challenges of the Corporation Litigation matters

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

4. 2. Background

5. Positioning of Armscor STRUCTURE OF THE MINISTRY OF DEFENCE AND MILITARY VETERANS Minister of Defence and Military Veterans Deputy Minister of Defence and Military Veterans DEPARTMENT OF DEFENCE DEPARTMENT OF MILITARY VETERANS ARMSCOR Chairman of Armscor Chief of the SANDF Secretary for Defence Director-General Armscor Board of Directors Services and Divisions Services and Divisions Armaments Corporation of South Africa (Ltd)

6. Governance • Statutory Corporation – Act No 51 of 2003 • Governed and Controlled by a Board of Directors - Accounting Authority of Armscor - DefenceMatériel 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

7. 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

8. Execution of Armscor Mandate Armscor Armscor Defence Institutes • 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. Armscor Dockyard

9. 3. STRATEGIC FOCUS

10. Armscor Group – Strategic Priorities 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) Objectives set to measure the achievement as well as Service Level Agreement execution

11. 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) • 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. • Dockyard Operationalisation of Dockyard and exploiting commercialisation opportunities Strategy developed and business plan is being developed.

12. Strategic Initiative 2: PEOPLE / CAPABILITIES 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.) • 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

13. Strategic Initiative 3: BROAD BASED BLACK ECONOMIC EMPOWERMENT (BBBEE) 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 Board • Verification of ARMSCOR BBBEE level done and is at level 6 • Benchmarked similar organisations and analysis done for required actions for ARMSCOR to achieve BBBEE level 4. • For industry BBBEE strategy is being implemented

14. Strategic Initiative 4: STAKEHOLDER RELATIONS Challenge: Negative perceptions about ARMSCOR due to poor stakeholders relations and negative image. How the strategy seeks to address the problem Appoint stakeholder relations manager, Identify all stakeholders, revisit/review strategy of stake holder engagement to manage relationships / improve reputation and ensure compliance Identified stakeholders Ministry of Defence (DOD) Parliament Defence Secretariat SA National Defence Force (SANDF) Industry Board of Directors Employees Organised Labour Media Regulatory Bodies and Treasury Stakeholder relations Manager appointed Review strategy and develop a divisional structure

15. Strategic Initiative 5: LOCAL INDUSTRY SUPPORT 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

16. Strategic Initiative 6: OPERATIONAL EFFICIENCIES 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 • Productivity management system is being developed • IM/IT Strategic Plan • Revisited the IT Strategy • Short term actions implemented • Benchmarking of similar organisations is being done • ARMSCOR Calendar has been developed • implemented to achieve a more integrated organisation

17. 4. CORPORATE PERFORMANCE

18. 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: • All the SDP projects performed well, now focussing on final deliveries and operational tests and evaluations • Airbus A400M project was terminated • Other Special Defence Account Projects performed well while progress were made with GBADS and Rooivalk Projects that experienced delays

19. Finance

20. 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%

21. ARMSCOR 2011/12 Financial Overview

22. STRATEGIC FOCUS ACTIVITIES TO ADDRESS FUNDING Efficiency savings exercise Reviewing expenditure and processes to ensure available funding is spend on service delivery Funding model Costing of functions to substantiate funding required to perform mandated functions Update and review of Service Level Agreement

23. CEO APPOINTMENT PROCESS • New Board to be appointed • Process to be finalised by the new Board of Directors • The successful candidate will be recommended to the Minister as a shareholder

24. AIRBUS A400MStatus Feedback

25. A400M Contract Termination November 2009 contract terminated Prepaid payments due to Armscor in January 2010- Several meetings with Airbus demanding payments Challenges and delays: Disputing right of termination Linking purchase contract to offset contract Schedule payments Contract requirements Schedule payments

26. 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.

27. Proposed Repayment Schedule • Agreed on five scheduled payments from January 2011 to December 2012. • Interest will accrue to ARMSCOR from 05 Jan 2010 to date of payment • Airbus sent a letter still linking two contracts (Purchase and Offset) • Letter of demand sent by Armscor demanding payment within 15 days

28. HEAVY AIR LIFT CAPABILITY • The existence of requirement was confirmed before cancellation. • Alternatives were considered for short term provision of the capability • Long term strategy was agreed to: Review of the requirement by SAAF Approved requirement to follow the process of acquisition.

29. Funding Challenges

30. Funding challenges of the Corporation Challenge: Inadequate funding • 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.

31. Funding challenges of the Corporation • Dockyard SA Navy capability required needs additional funding Required Capability Analysis completed • Renewal of facilities • Increase human resources required Action Plan • Engaged Chief of Navy, SecDef • The additional funding requirements included in Treasury funding requirements • ARMSCOR Defence Institutes Action Plan Required Capability Analysis completed Strategy formulated to achieve breakeven Funding Model revised

32. Litigation Matters • 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. • 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

33. Repositioning of Armscor

34. Repositioning of Armscor • New Armscor Board of Directors appointed • A strategic session is planned for 14-15 July 2011

35. THANK YOU