PRESENTATION OF THE ARMSCOR CORPORATE STRATEGYTO THE PORTFOLIO COMMITTEE ON DEFENCE AND

MILITARY VETERANS

MR SIPHO MKWANAZI – ACTING CEO

DATE: 28 November 2012

CONTENTS1. ARMSCOR MANDATE

2. ARMSCOR’S BOARD OF DIRECTORS

3. ARMSCOR’S FUNCTIONS

4. ARMSCOR STRATEGY

5. STRATEGIC FOCUS

6. SERVICE DELIVERY INDICATORS ACCORDING TO THE SLA WITH DOD

7. FINANCIAL OVERVIEW

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ARMSCOR MANDATE

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ARMSCOR MANDATE

• Armscor’s mandate is contained in the Armscor Act, which serves as its Memorandum of Incorporation;

• Its objectives are to meet the defence materiel needs, technology, research, development, analysis, test and evaluation requirements of the DOD effectively, efficiently and economically whilst adhering to accepted principles of corporate governance and lawfulness

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ARMSCOR FUNCTIONS Acquire Defence material on behalf of the Department of Defence as

Department may require;

Manage such technology projects as may be required by the Department;

Establish a programme management system to support acquisition technology projects;

Provide for a quality assurance capability;

Establish a system for tender and contract management for defence materiel;

Establish a system for tender and contract management for commercial materiel procurement requested in writing by the Secretary for Defence;

Dispose of Defence Materiel in consultation with the original manufacturer;

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ARMSCOR FUNCTIONS Establish a compliance administration system for the Department as

required by the Law;

Support and maintain such strategic and essential defence industrial capabilities, resources and technologies as may be identified by the Department;

Provide defence operational research;

Establish a defence industrial participation programme management system;

Provide marketing support to defence-related industries in relation to defence materiel;

Manage facilities identified as strategic by the Department in a service level agreement and;

Maintain such special capabilities and facilities as are regarded by the Corporation not to be commercially viable but which may be required by the Department for security and strategic reasons.

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ADDITIONAL FUNCTIONS

• Subject to Ministerial approval, Armscor may exploit commercial opportunities arising from its duty to acquire defence materiel and technology projects;

• Procure commercial materiel on behalf of any Organ of State and;

• Subject to arms control rules, acquire defence materiel and manage technology projects on behalf of any sovereign State

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ARMSCOR BOARD

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THE FIRST 18 MONTHS IN OFFICE• The Board is the Accounting Authority of Armscor;

• The current Board assumed Office in May 2011 for three years;

• The Board noted with concern the Resourcing of the Corporation (i.e. Financing, Infrastructure, and HR)

• The Board noted with concern that Armscor’s ability to spearhead military technological advancement had been eroded;

• It also noted that its ability to direct military industrial development and contribute to job creation, BBBEE, EE, and DIP was not ideal;

• Accordingly, the Board together with management designed a strategy for the Corporation into the future.

• The Board also appointed four new Committees to facilitate its work

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ARMSCOR STRATEGY

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THE STRATEGY

• In developing the Strategy the following was considered:

• Armscor’s legislated mandate as contained in the Armscor Act

• The fact that the creation of Armscor as a company is meant to insulate Government from liability for Armscor’s acts - This is important to ensure that Government is not unduly drawn into acquisition controversies;

• The strategic environment in which Armscor operates.

• The fact that for Armscor to deliver it’s mandate effectively, efficiently and economically a strengthened organisation and a capable SA Defence Industry that is sustainable are required

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MAIN CONSIDERATIONS

• Building of a strong State Production capacity;

• Building a strong regional outlook and marketing effort on the continent;

• Developing a strong research capacity on the country;

• Supporting the local defence-related industry;

• Ensuring that the defence-related industry is not controlled from outside;

• Ensuring that the national strategic technologies are protected;

• Financing the Corporation;

• Playing a leading role in developing industry;

• Leading efforts of commercialization and diversification of defence technologies;

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MAIN CONSIDERATIONS

• Use expertise to support government acquisition efforts;

• Participating in Government job and skills development efforts;

• Using acquisition power to leverage support for industry participation in main acquisition from foreign suppliers;

• Ensuring that stakeholders support the strategy and activities of the Corporation;

• Exploiting the goodwill of countries on the Continent;

• Building on the research capacity of the country;

• Building of strategic relationship internationally for marketing and research purposes;

• Ensuring that the region and continent is aware of the expertise of Armscor in acquisition

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Legal Mandate

PILLARS EXPLAINED• Denel produces critical strategic and essential systems and

solutions that cannot be compromised;

• Equally, Armscor should direct the industrial participation of the SA defence industry in all foreign acquisitions of significance;

• Armscor has an important leverage on the sector and its decisions should ensure that lost capabilities are recovered an that SA companies lead the local defence industry;

• Armscor facilities are of a strategic nature and should therefore be maintained and developed;

• Armscor should identify and support institutions that undertake research that would be useful to it and;

• Armscor’s IP should be protected and diversified for general use.

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CRITICAL SUCCESS FACTORS

•Running Armscor as a business (Corporate Restructuring, sustainable funding model, improved balance sheet);

•Building a strong Regional Outlook and Corporation and;

•Implementation of strategic projects (Truck, Utility Helicopter, Missile Systems, Tractor Systems and Ship Building);

•Building Strong International Partnerships

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ORGANISATIONAL AND STRUCTURAL IMPLICATIONS

THE BOARD OF DIRECTORS

The Board of the Corporation will be affected in the following manner:• Strategic Direction of the Corporation. • Tender Board for Acquisition For Clients• Committees of the Board.

Business Development and Investment Committee

Research and Development Committee

Acquisition Committee

Marketing and Industry Support Committee

THE EXECUTIVE STRUCTURE

Acquisition Department

Research and Development Department

Business Development and Investment Department

Marketing and Industry Support Department

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STRATEGIC FOCUS

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ARMSCOR’S STRATEGIC FOCUS

The strategic focus areas are based on the strategy of the Corporation and the following underpin the successful execution thereof:

1.Funding and Growth

2.People / Capabilities

3.Organisational effectiveness and efficiencies

4.Stakeholder Relationships

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Strategic Initiative 1: FUNDING AND GROWTH

1. Challenge:

Insufficient funds to execute mandate

2. How the strategy seeks to address the challenge: Financing of Armscor ( Service charge, capability maintenance fee, royalties from

IP and investment income) New funding model was developed with the focus of ensuring a sustainable

organisation. Growth and income generation (Exploit commercial opportunities in areas:) Marketing and using excess capacity of strategic facilities from which external

income can be generated. Management and exploitation of Intellectual Property Improving IP management based on weaknesses identified. Developed a new IP management policy. Seeking opportunities for IP exploitation. The review of three year Service Level Agreement with DOD including

performance agreement and rates for services New SLA drafted, agreements to be finalised with the DOD.

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1. Challenges:

Resourcing of the organisation through skills retention, renewal of HR and repositioning the organisation’s HR capability

2. How the strategy seeks to address the challenges:

(a) Organisational restructuring and recruitment of required capabilities Formed Board Committees to strengthen focus areas (Audit and Risk Committee;

Human Resources, Social and Ethics Committee; Finance, Business Development and Investment Committee; Marketing and Industry Support Committee, Research and Development Committee)

Organisational structure was developed and in the process of being implemented which will also resolve the acting positions.

(b) HR Plan focussed specifically on: Skills retention Skills development Succession planning Partnering with National and International institutes

Developed a formal process to implement succession planning. The process of identifying critical positions and potential successors has been completed.

Strategic Initiative 2: PEOPLE / CAPABILITIES

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(c) Create a positive organisational culture Align corporate culture with strategy, monitor progress and the

execution of the cultural audit action plan A cultural survey has been conducted reflecting a 1% improvement to

62.87%. Further areas of concern have been identified for improvement.

(d)Transformation of the organisation Employment Equity Plan developed and implemented to deal with

transformation of the organisation in accordance with the EE Act.

(e) Maintain and extend the capability required to execute the strategy Aligned the organisational structure to support the strategy

(f) Research and development Board Committee created that focusses on Research and Development Identify critical positions for business continuity and growth Implement skills development and mentoring plans Grow capability in line with business growth opportunities

Strategic Initiative 2: PEOPLE / CAPABILITIES

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1. Challenges:

Operational inefficiencies and effectiveness (Outdated infrastructure and IT application systems, lack of alignment, integration and efficiency measurements)

2. How the objective seeks to address the challenges: Determine and improve the effectiveness of the organisation The renewal of out-dated IT application systems Risk assessment of existing application and skills evaluation completed and

improvement in process Critical capabilities was in-sourced. Implement an in-house integrated disaster recovery, storage and e-mail archiving

solution. Restructure organisational units into business entities ( Dockyard and AB Logistics)

Business Plans focussing on sustainability have been developed and submitted to the Board. The necessary approvals sent to the MOD .

Conduct Dockyard due diligence study and develop improvement plan High level assessment at Board level conducted to define the problem and

challenges in the management and operation of Dockyard. Request for Information sent to Industry for the due diligence study.

Strategic Initiative 3: ORGANISATIONAL EFFICIENCIES AND EFFECTIVENESS

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1. Challenges:• Local industry support (expanding market opportunities in the region and

continent)• Negative perceptions about ARMSCOR due to reasons such as a lack

of understanding of the Corporation’s legal mandate and processes

2. How the strategy seeks to address the challenges:(a) Local industry support

Integrated Industry Support Strategy developed Policies to support growth of local industry such as increased local spend,

BBBEE, DIP and IP.

(b) Stakeholder Engagement strategy Identification and prioritisation of key stakeholders completed Planned engagements with MOD, DOD (Sec Def & CSANDF), and

Denel established Engagement are in process with SAPS, Correctional Services and

Defence Industry

Strategic Initiative 4: STAKEHOLDER RELATIONSHIPS

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Strategic Initiative 4: STAKEHOLDER RELATIONSHIPS (Cont.)

(c) Partnerships with SADC and AU countriesComplete a desktop study identifying opportunities within the SADC and

AU countries.Discussions was held with, amongst others, Botswana and Angola at

AAD 2012. Discussions have taken place with Senegal and Benin.

(d) Strategic Partnerships with international countries Identifying possible strategic partners within the BRICS countries.

Discussions have been held with India and Brazil. Further discussions were held with Russia, and China at AAD 2012.

(e)Armscor Brand Positioning & Marketing – Appointing a General Manager for Marketing Division and implementing

the strategy of marketing Armscor

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SERVICE DELIVERY INDICATORS

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SERVICE DELIVERY INDICATORS

SERVICE DELIVERY INDICATORS

In terms of Service Level Agreement (SLA) with DOD the following performance measurements are agreed to:

1.Contracts to be placed – timeous execution of requirements (90% compliance)

2.Contractual payments made – utilisation of available funding (90% compliance)

3.Management of DIP program – Execution of obligation in terms of DIP agreements – (R350 million of DIP credits)

4.Management and execution of Defence Technology, Research, Test and evaluation – achievement of contractual milestones (90% compliance)

5.Armscor Dockyard – compliance with performance agreement, cash flow and training (90% compliance)

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FINANCIAL PERFORMANCE

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FINANCIAL OVERVIEWFINANCIAL OVERVIEW

• Financing the Group remains a challenge

Income Statement Financing of the group is mainly through a service fee charged for

services (80%) while supplemented by a capability maintenance fee for strategic capabilities (14%) and investment income.

The main expenditure as a service organisation remains personnel and related expenditure (73%) while IT related costs represents 12%.

Based on the finance model the group will achieve a profit for the year which will ensure sustainability and will result in an increase of the shareholder’ s interest in the group.

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FINANCIAL OVERVIEWFINANCIAL OVERVIEW

Balance sheet Land and buildings is reflected at valuation from the new financial year which

reflects a significant increase in the total assets of the group

As reflected in the financial information included in the Corporate Plan the financial information of AB Logistics and the Dockyard are reflected as separate entities within the group

After consideration by the Board, a decision was taken for AB Logistics to remain in the Group until it can prove its own sustainability

A due diligence study is conducted to determine if Dockyard should become a separate entity from Armscor Group.

The group will still be financially sound with a debt/equity ratio of 20% while 16% of the total assets are funded though outside financing

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THANK YOU

QUESTIONS AND ANSWERS

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