Pretoria - Armscor, the state-owned weapons acquisition agency, turned in a R31 million surplus in financial 2002/03, more than double last year's R13.4 million.

The organisation had a deficit of R25.5 million on its operating budget, its subsidiaries made a loss of R9.2 million and there was a R34.7 million profit on the sale of unwanted defence materiel.

It earned R31 million in finance income.

Last year, there was a R40.1 million deficit on operations, a R25.4 million profit from subsidiaries and R6.3 million from the disposal of old equipment. In 2001/02, it had net finance income of R21.8 million.

The income generated by subsidiaries grew to R390.4 million from R344.2 million and sales of unwanted stock went from R72.5 million in 2001/02 to R276.1 million.

The government's transfer payment increased from R194.9 million to R209.4 million. But operating costs, which are meant to be covered by the state, amounted to R234.9 million.

At the handover of the annual report over to defence minister Mosioua Lekota yesterday, chief executive Sipho Thomo complained that the government's transfers had shrunk in real terms over the past five years and this had made it very difficult for the organisation to do its job of procuring matériel for the defence department and of ensuring its quality.

Because of the arms deal, the total value of Armscor's acquisition activities have increased to R7.9 billion in 2002/03 compared with R7 billion the year before and R2.4 billion in 1999.

The effect of this underfunding, Thomo said, was that salaries had lagged the market, leading to resignations and an erosion of technical capabilities.

It had resulted in an "inability to transform the workforce" and an increased workload.

The organisation's other projects include run-flat inserts that will allow vehicles to be driven safely after a puncture, a portable X-Ray machine and containerised medical units.

Thomo said Armscor had signed an agreement with People's Bank, which had agreed to fund black empowerment participation in these projects.

With acknowledgements to Quentin Wray and the Business Report.