Publication: Business Day Issued: Date: 2010-02-02 Reporter: Wyndham Hartley

Fresh evidence of Armscor bungles

 

Publication 

Business Day
Date 2010-02-02
Reporter Wyndham Hartley
Web Link www.bday.co.za


Cape Town - A bungled 45m deal with European aircraft manufacturer Agusta Westland has emerged as another reason for the dismissal of Armscor CEO Sipho Thomo, and could also have been the cause of the sudden resignation of Denel Saab Aerostructures CE Lana Kinley.

With Parliament's defence committee scheduled to be briefed this morning on the Thomo dismissal by the Armscor board, it has emerged that an additional charge was added in his disciplinary hearing, and this related to Agusta Westland's defence industrial participation commitments.

It appears that Agusta Westland was late in concluding its defence industrial participation obligations, and was facing penalties of about R90m.

The company then offered SA a deal that would have involved the dropping of the penalties in return for guaranteed contracts of 45m over five years for the construction of its A109 helicopter for other African clients.

It is understood the Department of Defence favoured the deal, but it was rejected by others in the government or state defence industry establishment.

Ironically, had the contract been approved, the guaranteed work for five years could have been a lifeline for the cash- strapped Denel Saab Aerostructures. The company manufactured and assembled most of the 30 A109 helicopters bought in SA's controversial strategic arms procurement in 1999.

To have continued manufacturing the aircraft for other Agusta Westland clients in Africa would have been a positive on the balance sheet.

Denel Saab Aerostructures chairman Llewellyn Jones confirmed to Business Day two weeks ago that Kinley's resignation was a result of a disagreement over a major contract.

It is possible that the rejection of the Agusta Westland offer precipitated her departure.

In a letter to Thomo in early December, Armscor chairman Popo Molefe told him that the charge sheet for his disciplinary hearing was amended with the addition of another charge.

In the letter, Molefe told Thomo: You, without authority and knowledge of the board, negotiated and gave an expectation to Agusta Westland that Armscor would revise a claim it had against Agusta Westland for US12,5m. This was in addition to the other charges, which included the way Thomo broke the news of the massive escalation in the cost of the Airbus A400M military transport aircraft from R17bn to R47bn.

The board said this was done before the Defence Ministry had been consulted, and had done great harm to SA's reputation.

The A400M contract with Airbus has since been cancelled, but a contract between Denel Saab Aerostructures and Airbus for the manufacture and supply of components is still in place. Because of the four-year delay in the A400M construction, Denel Saab Aerostructures role in the project has been similarly delayed, harming the group financially.

Democratic Alliance defence spokesman David Maynier said: What we seem to be dealing with here is a high-level bungle.

How is it possible that a 45m opportunity falls between the cracks at the Department of Public Enterprises and Department of Defence?

There are two critical questions here: who dropped the ball, and what is being done to pick it up?

Unfortunately, it is likely that tomorrow's portfolio committee on defence and military veterans hearing with Popo Molefe, chairperson of the Armscor board, will be postponed.

Maynier said that Talib Sadik, Denel's CEO, should shed light on the matter when he appeared before Parliament's standing committee on public accounts later this week.

Thomo was sacked last month following a protracted disciplinary process that culminated in an independent inquiry, which recommended the termination of his services.

In the letter setting out his disciplinary inquiry, Thomo is also hauled over the coals for his conduct at a meeting of Parliament�s defence committee last November.

It was said that Thomo arrived more than an hour late, and that he appeared to fall asleep at the table.

This was described as disgraceful and conduct that was unbecoming for the head of Armscor.

hartleyw@bdfm.co.za

With acknowledgements to Wyndham Hartley and Business Day.


Unfortunately, it is not straightforward to really get to the bottom of the Agusta Westland saga due to the omission of a currency symbol.

Is the 45m, USD45 million or Euro 45 million.

In that case exchanging a Euro 45 million contract for a R90 million penalty might at first glance make sense, but maybe not a second glance.

Typically the over-bloated parastatals and armaments companies make 10% to 15% nett profit before tax (NPBT) and maybe 30% to 50% gross profit (GP).

In this case the government would be interested in the GP because the salaries and some other expenses would remain within the national economy.

So say the GP is 50% and the contract was worth Euro 45 million = ZAR340 million, then the GP is R170 million.

And the penalty was R90 million.

But the GP would have to be offset to a degree by a risk factor, typically 30%.

So the real value of the contract is then R120 million.

But cash is king and so Thomo went for the R90 million cash in the bank.

Not necessarily a bad call.

And it's Armscor's call, not Denel's call.

Also, DIP defaulters just have to get the stipulated penalties, otherwise the obligations are not taken seriously.

But sleeping in Parliament, Thomo thought that because most (ANC) MPs do it all the time, he could also.