PRESENTATION OF THE ARMSCOR ANNUAL REPORT TO THE PORTFOLIO COMMITTEE ON DEFENCE AND MILITARY VETERANS MR SIPHO MKWANAZI – ACTING CEO DATE: 10 th OCTOBER 2013

Scope 1. Introduction 2. Performance of Operational Functions  Acquisition  Research and Development  Dockyard 3. Human Resources 4. Corporate Performance versus Goals / Objectives 5. Financial Performance 6. Challenges 7. Questions & Answers 2

Introduction Armaments Corporation of South Africa SOC Limited (Armscor) established in terms of the Armaments Corporation of South Africa, Limited Act (Act 51 of 2003) State – owned entity as contemplated in the Companies Act, 2008 Listed as a Schedule 2 Public Entity in terms of the PFMA Further regulated by the Regulations issued in the terms of the PFMA and the Companies Act The Minister responsible for Armscor is the Minister of Defence & Military Veterans (MOD&MV) The Board of Directors is the Executive Authority of Armscor 3

Introduction (Cont.) Within its mandate, Armscor’s objectives are to meet the following requirements of the DoD: defence matériel needs technology development research & development analysis test & evaluation effectively, efficiently and economically Adhere to accepted principles of corporate governance and lawfulness Highlights: Clean Audit Achieved level 3 BBBEE rating from level 7 Dockyard obtained ISO 9001: 2008 accreditation Achieved a surplus of R84.6m (2012/13) against R70.2m in 2011/12 51% improvement on results of Corporate Social Investment (CSI) Flagship programme – Learner Enhancement Programme 4

MARITIME SYSTEMS Following the delivery and commissioning of three submarines, engineering changes were made to meet:  operational  safety  support related requirements These were initially omitted due to financial constraints Changes are almost completed, awaiting  Department of Public Works to complete escape training facility by end Sept 2013  Availability of submarine to carry out final on-board qualification by April 2013 Performance of Operational Functions - Acquisition 5

AIRBORNE SYSTEMS LUH - All 30 Helicopters have been delivered to SAAF & updated with latest production standards Gripen - 9 x dual seat aircraft -17 x single seat aircraft delivered to SAAF Aircrafts in full functionality, electronic warfare and datalink capability completed in Sept 2013 Integration of the A-Darter Missile was completed and delivered in November 2012 Hawk – Operational flight trainer has been upgraded to the same standard as the fleet The fleet exceeded flying training hours in October 2012 Rooivalk - Rooivalk fleet was upgraded to the MK1 deployment baseline A depot level support was also established Performance of Operational Functions - Acquisition (Cont.) 6

39 Oryx Medium Transport Helicopter (MTH’s)  Development of avionics upgrade was completed  The modification on the first four helicopters is progressing well A-Darter Missile development  Jointly funded with the Brazilian Air Force  Programme is progressing well despite some technical delays experienced  Seeker head has reached an acceptable level of technology maturity Performance of Operational Functions - Acquisition (Cont.) 7

LANDWARD SYSTEMS Ground Based Air Defence System  New Local Warning Segment of the Ground Based Air Defence System has been completed  Phase two of the GBADS programme which entails upgrading of fire-control system of the 35 mm anti – aircraft guns has commenced New Generation Infantry Combat Vehicle  Locally developed 30mm Camgun is undergoing final environmental test and evaluation  Advanced development was completed in December 2012 and testing commenced in February 2013  Development of an insensitive munition-compliant missile will be further explored in the next two years Performance of Operational Functions - Acquisition (Cont.) 8

Performance of Operational Functions - Research & Development (Cont.) TEST & EVALUATION FACILITIES aims to maintain the capability Gerotek  28% funded from DoD transfer payment  Relying on commercial business to fund shortfall Alkantpan  33% funded from DoD transfer payment  67% operations funded from local and foreign business 9

Performance of Operational Functions - Research & Development (Cont.) DEFENCE SCIENCE AND TECHNOLOGY INSTITUTE Armour Development  DoD transfer payment funds basic capability – 95%  Relying on commercial business to fund shortfall Defence Decision Support Institute (DDSI)  100% funded from DoD transfer payment Ergonomics Technologies (Ergotech)  95% funded from DoD transfer payment  5% funded from commercial contracts Flamengro  75% funded from DoD transfer payment  Funded 25% of operations from local business contracts 10

Performance of Operational Functions - Research & Development (Cont.) DEFENCE SCIENCE AND TECHNOLOGY INSTITUTES Hazmat  100% of income generated from local commercial contract Institute of Maritime Technology (IMT)  88% funded from DoD transfer payment  12% from local commercial work Protechnik  98% funded from DoD transfer payment  2% from commercial contracts 11

Performance of Operational Functions - Dockyard Obtained ISO 9001:2008 accreditation Current financial year focus is on SHE matters Funding based on a fixed transfer payment to deliver predetermined capabilities Current capacity insufficient to deliver full requirements Received R30.6m additional funding  Capacity rejuvenation (skilled labour & equipment) Insufficient & sustainable funding remains Re-modernisation study completed in July 2013 Despite challenges, overall achievement 92% versus 90% target 12

Performance of Operational Functions - Dockyard(Cont.) Planned and unplanned maintenance projects  Frigates: SAS Spioenkop experience challenges, eventually completed in March 2013  Patrol Vessels: SAS ISSAC Dyoba started maintenance in March 2013 for collision damage repairs which was successfully completed SAS Umhloti, unscheduled maintenance and repairs completed on time SAS Umzimkulu, successfully completed unplanned maintenance  Tugs: Tug Indlovu Tug Demist All work successfully completed on time Tug Tshukudu Tug Umalusi, unscheduled maintenance planned for completion in April

Performance of Operational Functions - Dockyard(Cont.) Planned and unplanned maintenance projects (cont.)  Submarines: SAS Manthatisi OEM executing refit at Dockyard, to be completed in July 2014 SAS Charlotte Maxeke completed within revised date due to unforeseen damage SAS Queen Mojaji, activities completed within planned schedule  Independent Vessels: SAS Protea completed in Feb 2013 vs. planned October 2012 due to unanticipated damage of valves to be removed, repaired and replaced SAS Drankensberg completed within revised date 14

Human Resources Improvement in overall transformation, esp. from mid management to top management Improvement in employee satisfaction survey – 66.5% (2012/13) from 62.9% (2011/12) 90 young engineers and scientist were identified for succession planning Skills Development Programmes  Armscor Senior Management Leadership Programme  Functional training  Dockyard training centre  Adult Basic Education and Training (ABET)  Talent Development Programme CSI Flagship programme – “Learner Enhancement Programme” in support of Maths and Science in schools resulted to an average of 51% improvement in these subjects 15

Corporate Performance vs. Goals Objectives 1 – 3 : Measure effectiveness of acquisition function in terms of: Contracts to be placed: commitment of funds Achieved cash flow against formally planned cash flow i.t.o. of commitments Achieved goals except for System support: Acquisition and Procurement (operational funds) Objectives 1 – 3 : Measure effectiveness of acquisition function in terms of: Contracts to be placed: commitment of funds Achieved cash flow against formally planned cash flow i.t.o. of commitments Achieved goals except for System support: Acquisition and Procurement (operational funds) Objective 4: Management of Defence Industrial Participation: Execution of DIP obligations Objective not achieved Objective 4: Management of Defence Industrial Participation: Execution of DIP obligations Objective not achieved OBJECTIVES MEASURING FUNCTIONS IN TERMS OF SLA Objective 5 : Management & Execution of Defence Technology, Test and Evaluation requirements for DOD: Execution by Armscor Defence Institutes of contractual milestones/ deliveries Objective achieved Objective 5 : Management & Execution of Defence Technology, Test and Evaluation requirements for DOD: Execution by Armscor Defence Institutes of contractual milestones/ deliveries Objective achieved Objective 6 : DOCKYARD Management and performance against Dockyard Mandate Objective achieved Objective 6 : DOCKYARD Management and performance against Dockyard Mandate Objective achieved 16

Corporate Performance vs. Objectives (Cont.) Strategic objective 1 – Funding & Growth Measure the expenditure compliance and effort to secure sufficient funding to sustain the organisation Objective not achieved Strategic objective 1 – Funding & Growth Measure the expenditure compliance and effort to secure sufficient funding to sustain the organisation Objective not achieved Strategic objective 2 – People & Capabilities Measuring Armscor’s ability to attract and retain employees through a positive organizational environment xObjective partly achieved Strategic objective 2 – People & Capabilities Measuring Armscor’s ability to attract and retain employees through a positive organizational environment xObjective partly achieved ACHIEVEMENT OF STRATEGIC OBJECTIVES Strategic objective 3 – Organisational Effectiveness & Efficiencies Measure the operational efficiency of Armscor x Objective partly achieved Strategic objective 3 – Organisational Effectiveness & Efficiencies Measure the operational efficiency of Armscor x Objective partly achieved Strategic objective 4 – Stakeholder Relationships Measure the relationships with stakeholders & Armscor’s compliance to good governance x Objective partly achieved Strategic objective 4 – Stakeholder Relationships Measure the relationships with stakeholders & Armscor’s compliance to good governance x Objective partly achieved 17

Financial Overview Armscor received an unqualified Audit Report Net asset value (Shareholder’s interest) increased by 187% to R1 792m million due to revaluation of land and buildings Profit of R84.6m realised against R70.2m in 2012 Total revenue increased by 1% to R308.2 million Personnel costs remains main contributor at 74.4% of total operating cost 18

Financial Position as at 31 March 2013 Assets 19

Financial Position as at 31 March 2013 Equity and Liabilities 20

Statements of Comprehensive Income for the year ended 31 March

Armscor Challenges ChallengePlan to overcome Insufficient Funding  New funding model developed, such as capability maintenance fee, royalties from IP and investment income  Exploitation of IP for dual use technologies  Pursue acquisition opportunities for other government department and SADC / AU countries Resourcing of the organisation  Grow human capability in line with business growth opportunities and demand Training and Skills Development Skills retention Succession planning  Implementation of Employment Equity Plan  Executing of employee satisfaction survey results Operational inefficiencies and effectiveness  Implementation of IT strategy  Re-modernisation study of Dockyard Local Industry Support  Provide additional marketing support through pursuing government to government collaboration Establish strategic partnerships with international technology know-how partners  Local and international exhibitions  Implementation of BEE and DIP 22

Questions & Answers 23