28 May 2020 PRESENTATION TO THE JOINT STANDING COMMITTEE ON DEFENCE
28 May 2020
PRESENTATION TO
THE JOINT STANDING
COMMITTEE ON DEFENCE
INDEX
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1. DENEL’S DOD FUNDED MULTI-YEAR PROGRAMMES
2. PROJECT HOEFYSTER
i. PROGRAMME BACKGROUND
ii. PROGRAMME STATUS
iii. CAPABILITY TO DELIVER
iv. PROGRAMME CHALLENGES
v. PROGRAMME SPEND
vi. PROGRAMME SCHEDULE
vii. LESSONS LEARNT
3. CONCLUSION
OVERVIEW OF DENEL’S DOD FUNDED
MULTI-YEAR PROGRAMMES
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Item Denel Division Programme Product / System
Remaining Contract Values
Planned DateContract Balance
Funding
1 DENEL Land Systems MUHALI (KT545838) MUHALI Phase 1B: Obsolescence Upgrade of the GV6 System Ongoing to Jun-21 R145m Yes
2 DENEL Land Systems TOPSTAR PRODUCTION AND TRANSITION PHASE OG THE GLNS- Ongoing to Jul-21 R223m Yes
3 DENEL Land Systems BIRO Supply GI2 Cannons (x3) MS in Aug-20 R5m Yes
4 DENEL Land Systems HOEFYSTER Phase 1 Infantry Combat Vehicles Development (R1.2bn in 2007 ZAR) Ongoing to Dec-22 R150m Yes
5 DENEL Land Systems HOEFYSTER Phase 2 Infantry Combat Vehicles Production (R8.392bn in 2013 ZAR) Ongoing to Mar-29 R6.692bn Partial
6 DENEL Aeronautics Oryx Product Supply Support Oryx Medium Transport Helicopter (R1.2bn for 3 years) Ongoing to Apr-21 R433m Annually
7 DENEL Aeronautics Rooivalk Product Supply Support Rooivalk Combat Support Helicopter (R1bn for 3 years) Ongoing to Apr-21 R361m Annually
8 DENEL Aeronautics C130 Product Supply Support C130BZ Transport Aircraft (R350m for 3 years) Ongoing to Nov-21 R194m Annually
9 DENEL Aeronautics Hawk Ground Support & Test Equipment Hawk Lead In Fighter Trainer (R18.6m for 3 years) Ongoing to Mar-21 R7m Annually
10 DENEL Dynamics SA Navy Support Contract Umkhonto Surface-to-Air missile system Quartely to Mar-21 R4.8m Yes
11 DENEL Dynamics LOKI Development of Low Cost Target Drone Demonstrator MS in Aug-21 R32.7m Yes
12 DENEL Dynamics Seeker 400 IPSS Seeker 400 support Ongoing to Mar-21 R75.7 Yes
13 DENEL Dynamics KAMAS A-Darter Industrialization & production Ongoing to Nov-21 R428m Yes
14 DENEL Dynamics Glow II All Weather Air Defence Missile Demonstrator MS in Sep-20 R154.8m Yes
15DENEL Overberg Test
RangeDUCE-STORM
Provision and Maintenance of the RSA Multi-Purpose Test and Evaluation Technological Capabilities
Ongoing to Mar-21 R61m Yes
Total R8 974.8m
REMAINING ACTIVITY PER PROGRAMME
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Item Denel Division Programme
Estimated MZAR per fin year
20/21 21/22 22/23 23/24 24/25 25/26 26/27 27/28 28/29
1 DENEL Land Systems MUHALI (KT545838) 73 73 1452 DENEL Land Systems TOPSTAR 156 74 2303 DENEL Land Systems BIRO 5 5
4 DENEL Land Systems HOEFYSTER Phase 1 75 75 150
5 DENEL Land Systems HOEFYSTER Phase 2 260 804 804 804 804 804 804 804 804 66926 DENEL Aeronautics Oryx Product Supply Support 400 33 4337 DENEL Aeronautics Rooivalk Product Supply Support 333 28 3618 DENEL Aeronautics C130 Product Supply Support 117 78 1949 DENEL Aeronautics Hawk Ground Support & Test Equipment 7 7
10 DENEL Dynamics SA Navy Support Contract 5 511 DENEL Dynamics LOKI 33 3312 DENEL Dynamics Seeker 400 IPSS 76 7613 DENEL Dynamics KAMAS 214 214 42814 DENEL Dynamics Glow II 155 155
15 DENEL Overberg Test Range DUCE-STORM 61 61
1936 1411 804 804 804 804 804 804 804 8975
Funded : 1936 468 2404
Unfunded : 943 804 804 804 804 804 804 804 6571
REMAINING FUNDING REQUIRED PER PROGRAMME
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REMAINING FUNDING REQUIRED PER DIVISION
Item Denel Division
Estimated MZAR per fin year
20/21 21/22 22/23 23/24 24/25 25/26 26/27 27/28 28/29
1 DENEL Land Systems 569 1025 804 804 804 804 804 804 804 7222
2 DENEL Aeronautics 857 139 996
3 DENEL Dynamics 449 247 696
4 DENEL Overberg Test Range 61 61
1936 1411 804 804 804 804 804 804 804 8975
Funded : 1936 468 2404
Unfunded : 943 804 804 804 804 804 804 804 6571
Note: PMP has no multi-year DOD Orders
PROGRAMME HOEFYSTER
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HOEFYSTER BACKGROUND
• Programme was contracted to fulfil a number of requirements in various stakeholderenvironments including:
– Develop and Deliver new generation equipment to satisfy SANDF requirements
– Business injection for Denel to support Denel’s sustainability
– Job creation circa 2000 jobs across the Defence industry
– Establish and grow young engineering capability and capacity within thegovernment’s transformation directives
HOEFYSTER COMPLEXITY
• The scope and complexity of the programme:
– New Weapon Systems and ammunition
– New Sighting Systems
– New Fire Control Software to Avionics level certification
– New Electrical Systems and Safety Interlocks
– New Communications Systems
• Technical integration with above sub elements was extremely time consuming within the resource constraints of the organisation
HOEFYSTER CONTRACT SUMMARY
Orders Contract
Value (P0)
Major Deliverables
DEVELOPMENT
(Phase 1) IN
JUNE 2007R1.196bn
5x Engineering Development Models (EDMs) (Product Baselines (PBLs))
i.e. (Section Variant, Command Variant, Mortar Variant, Missile Variant,
Fire Support Variant, including logistics development).
PRODUCTION
(Phase 2) IN
AUGUST 2013R 8.038bn
244 Badger systems of which:
16x Pre Production Model (PPM) systems,
223x Production Systems, Upgrade of 5 x Engineering
Development Models,
Incl. Ammunition, Training Simulator Systems and all logistical
documentation and support elements.
PRODUCTION
(Phase 2 New
Variants) IN
AUGUST 2013
R0.354bn
Development of 4x Joint Task force group Variants i.e.
Ambulance Variant, Signal Variant, Tactical Command Post Variant
and Basic Artillery Observation System Variant.
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CONTRACT DELIVERABLES
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1. COMBAT VARIANTS.
SECTION VARIANT
COMMAND VARIANT
MORTAR VARIANT
FIRE SUPPORT VARIANT
MISSILE VARIANT
2. AMMUNITION.
3. TACTICAL COMMAND & CONTROL SYSTEM.
4. RECOVERY VEHICLES.
5. MAINTENANCE & REPAIR.
6. TRAINING SYSTEM.
7. LOGISTIC SUPPORT SYSTEM.
8. INTERFACES FOR:
Recovery Vehicles
Maintenance and Repair Vehicles
Special B-Type Vehicles
PROGRAMME STATUS
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PROGRAMME SUCCESSES- Ammunition:
• 30mm Ammunition Industrialised and 126 000 rounds delivered.
• 60mm Long Range Mortar Ammunition Industrialised and delivered.
- Main Weapon:
• 30mm CamGun Industrialised, 6 Pre-Production and 27 Production Models for Battalion 1 Section Variant delivered.
- Platform:
• 3 Section Variant and 1 Ambulance Variant Pre-Production Models, and 12 Production Common Platforms built and delivered by Patria.
• Finnish Common Platform Pre-Production and Manufacturing Baseline achieved.
- Turret:
• 4 Section Variant Pre-Production Model turrets built and integrated onto above Patria Platforms for (P)OT&E.
• Assembly of 1 FSV Pre-Production Model Turret complete (barring 2 Hatches and Secondary Weapon Bracket) with Production documentation verified during build.
• Section Variant, Fire Support Variant and Command Variant Pre-Production Model Turret Add-on Armour industrialised and delivered.
- Training Simulators:
• Mechanical assembly of 27 Driver, 15 Section Variant Turret, and 5 Command Variant Turret Simulators, and 5 Master Instructorand 5 Instructor Stations, loaded with Pre-Production software.
• Simulator facility used for training for (P)OT&E.
- System level
• SECTION VARIANT User Evaluation including Integrated Communications System successfully completed.
PROGRAMME SUCCESSES – HOEFYSTER DISPLAY
PROGRAMME SUCCESSES – AV8 TURRET PROGRAM
PHASE 1 & 2 COMMERCIAL STATUS/PROGRESS
Order Description Phase Contract Value Invoiced to date % Complete by Value
Development and production of 5 "Current
Variants"Phase 1 R0.978bn (P0) R0.875bn (P0) 89%
Industrialization and production of 5
"Current Variants" and common sub-
systems for "New Variants"
Phase 2 R8.038bn (P0) R1.554bn (P0) 19%
Design, develop, industrialize and produce
the unique portions of the New Variants
Phase 2 New
VariantsR0.354bn (P0) R0.049bn (P0) 14%
Industrialization and production of 60mm
Long Range Mortar Ammunition Phase 2 R0.135bn (P0) R0.135bn (P0) 100%
Total (P0) R8.527bn R1.738bn 20%
P0: Value at contract date, excludes pre-payment and inflation based escalation
P1: Value at time of payment, excludes Pre-payment, but includes escalation
CAPABILITY TO DELIVER
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CAPABILITY TO DELIVER
INTERNAL TO DENEL
• Denel is fortunate that the technical skills for this programme is largely in place given the security the contract has provided, there are resources available within the company to deliver on the programme
• Given the delay in Production Phase, there will be a level of re-industrialisation required in the production environment.
EXTERNAL TO DENEL
• Majority of technical skills are vested internally with limited skills in the supplier base.
• These external skills are largely in place but have been negatively impacted by the programme delay and financial position of Denel
• Some suppliers no longer exist and components will need to be sourced and industrialised again to ensure integrity in supply.
YOUNG TALENT ON HOEFYSTER
• Renata Westmacott who hails from Eldorado Park and joined Denel five years ago after obtaining a B Eng degree from the University of Johannesburg. Her responsibility is to provide system engineering and development support to all Badger variants as well as technical support during the industrialisation and production phases.
• Nkabe Motjale, a mechanical engineer, has been with Denel Landward for five years. The 31-year old from Ficksburg in the Free State is responsible for the design and integration of platform-related components.
• Lyzander Prinsloo, a structures and mechanism designer from Port Elizabeth, looks after the integration of all subsystem mechanical hardware on the Badger. The former student at the Nelson Mandela Metropolitan University has been with Denel for six years.
• Shale Modiba, a software engineer who graduated from the University of Pretoria, is responsible for the software development and qualification on the vehicle. One of the distinguishing features of the vehicle is its turret design and the integration of its 60mm breech-loaded long range mortar gun and Ingwe missiles into the system.
PROGRAMME CHALLENGES
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PROGRAMME CHALLENGES • Program Complexity
– The complexity of developing multiple variants simultaneously, combined with strenuous contractual requirements e.g. development of new guns, software safety certification on the variants place extreme schedule pressures on the program
• Current Company Financial Position
– Suppliers not supporting the programme until all outstanding invoices are settled – legacy debts.
– Supplier financial terms cannot be met with without letters of credit.
• VR Laser Closure
– Transfer of Technology to be repeated at Denel Vehicle System with approximately 18-24 months schedule impact.
• Eroded Supplier Base
– Suppliers are in distress either downscaling or closing down.
– At least 18-24 month impact to re-industrialise within local supplier base.
• Integrated Project Team Dynamics
– Programme delays have created an environment of misalignment on Program level where decision making is taking longer than necessary
PROGRAMME SPEND
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Item No. VARIANT Amount P1
1 Section Variant R 486,045,599
2 Fire Support Variant R 27,309,676
3 Command Variant R 102,919,147
4 Missile Variant R 230,671,122
5 Mortar Variant R 219,758,150
6Badger Integrated Logistical Support, Training Simulators, Indirect Fire
Control, etc.R 199,859,815
7 60mm Ammunition R 75,717,403
TOTAL R 1,266,563,509
PHASE 1 (DEVELOPMENT) AMOUNTS INVOICED TO DATE
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Item No. VARIANT Amount P1
1 Level 5 R 50,572,092
2 30mm and 60mm Standard Ammunition R 311,920,907
3 Training Simulators R 102,405,229
4 Turret R 99,683,215
5 Platform R 1,160,773,684
6 New Variants (Ambulance, Signal Variant, Artillery Variants R 199,859,815
7 60mm Long Range Mortar Ammunition R 148,773,039
TOTAL R 1,780,048,447
PRODUCTION (PHASE 2) AMOUNTS INVOICED TO DATE
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Item No. Cardinal Milestone DescriptionAdvance payment
received
1 Development (Phase 1) R 286,720,841
2 Industrialisation and Production of Current Variants (Phase 2) R 2,309,712,051
3 New Variants (Phase 2) R 70,909,228
4 TOTAL R 2,667,342,120
ADVANCE PAYMENTS RECEIVED
• Advance Payments may only be paid to Contractors on presentation of acceptable guarantees (Bank- or Corporate guarantees)
• DENEL was not able to supply Bank- or Corporate Guarantees at the stage of receipt of HY Phase 2 contract
• ARMSCOR and DENEL then came to the agreement that the Advance Payments would be paid into an ESCROW account:
• The account will be in the name of DENEL. Denel will receive the monthly interest benefit. The interest on the additional prepayments will be used to make a provision for the manufacture of the free systems offered. ARMSCOR will keep control over the payments from the account.
• There are three ways that DENEL can get the money from this account:1 Presentation of a BANK Guarantee2 Presentation of a CORPORATE Guarantee3 Delivery of the product / delivery line according to the contract
• All proceeds from Production order (Hoefyster Phase 2 Current Variants) to be paid into the ABSA collection account, except direct payments to pre-arranged suppliers, as well as the payments to the ESCROW account. Proceeds from ESCROW to be paid into collection account.
• DCO withdrew money against the ESCROW by issuing CORPORATE Guarantees. These monies were not paid into the collection account, but into DCO FNB account
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ADVANCE PAYMENT METHODOLOGY
PROGRAMME SCHEDULE
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Item
No.Cardinal Milestone Description
Current Contracted
date
Forecasted
Finish Date
Covid-19 Finish
Date
1 Section Variant Product BaseLine (1) November 2017 March 2020 Done
2Badger Section Variant Integrated Logistical
Support Product BaseLineNovember 2018 November 2020 November 2020
3 Fire Support Variant Product BaseLine (1) November 2017 July 2020 August 2020
4 Command Variant Product BaseLine (1) November 2017 December 2020 January 2021
5 Missile Variant Product BaseLine (1) November 2017 December 2020 March 2021
6 Mortar Variant Product Baseline (1) November 2017 March 20212021/22 Financial
year
7Badger Integrated Logistical Support Product
BaseLine – All VariantsNovember 2018 December 2022
2021/22 Financial
year
DEVELOPMENT SCHEDULE (PHASE 1)
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Item
No.
Cardinal Milestone
Description
Forecasted Finish
Date
Covid-19 Finish
Date
1 Battalion 1 September 2023 February 2024
2 Battalion 2 November 2027 May 2028
3 Joint Task Force Group October 2028 March 2029
PRODUCTION SCHEDULE (PHASE 2)
LESSONS LEARNT
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• Retention and creation of Jobs and stimulation of the economy
• Enhancement of skills in Science, Defence Technology, Engineering and Maths
• Sustainability of local defence sector and establishment of BBBEE suppliers
• Sustainability of Denel Capability base to support SANDF maintenance of its fleet, and major contracts
• Support SA Army to fulfil its constitutional mandate through deployable capability
• Reposition South Africa in the world as a force to be reckoned with in the defence sector
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WHY CONTINUE WITH THE PROGRAMME?
LESSONS LEARNT
Captured Lessons learned and impact Lesson Implementation Status
1. Weaknesses in the chosen system engineering contracting
model which allowed for.
a. Parallel development of five Variants, two ballistic
systems (guns + ammunition)
b. Contract included the Production (Phase 2) prices in a
Detailed Work Breakdown Structure and Hardware
Breakdown Structure. Most major sub-systems, for
example the main weapons, ammunition, sights were not
developed and/or qualified, this was planned for Phase 1
but already priced for Phase 2.
Impact - One team trying to execute this interlinked effort in parallel
was not successful and development naturally started to become
serial development with huge impact on timescales.
Currently, Project Life-Cycle Management (PLCM), is used
as a peer review mechanism to evaluate any bid or
campaign of significant value. Weak or inadequate options
are normally given alternatives including alternatives not
(even when pressured by business needs) to contract for
work that is declared not executable by independent
process review.
2. Parallel contracting and execution of mega complex programmes
requiring the same skills set.
Impact: AV8 - Malaysia and HOEFYSTER competed for the same
limited technical resources, since they were at the same technical
maturity level and based on the same solutions.
Development labour requirements and current critical
resources loading is thoroughly evaluated and closely
monitored for optimisation and avoidance of overloading in
line with semi-sequential execution. PLCM incorporates
resource planning. Possible new resourcing or utilisation of
current resources pool as it will become available.
Captured lessons learned and Impact Lesson Implementation status
3. The processes at Supply Chain are highly inefficient,
inflexible and do not support the fast tracking of acquiring
suppliers and placements of orders for prototype
Development.
Impact: Delays in procurement of hardware and components to
build and test engineering development models and the nett
effect is the delayed Development programme. Most
inexperienced suppliers do not deliver “first time right” solutions
and products. This also affect industrialisation inputs and
schedule.
In the short term, as far is supported by policy, project teams
will identify prototyping suppliers. supply chain must(and will)
handle contractual issues only, designers and project team
must identify suppliers based on criteria other than cost,
example will be the experience of the supplier and in the
medium to long term establish industrialisation
team/department that will support across Denel group and/or
use some strategic prototyping suppliers.
4. Contracting for cash-flow via a multitude of tiers of
deliverables, resulting in client and end-user involvement at
all levels.
Impact: This is the source of all technical mistrust between DLS
and ARMSCOR. This is the intended consequence of
designing a contract for cash flow.
All future contracts will be contracted at critical milestone level
not on multiple tiers
LESSONS LEARNT
CONCLUSION
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CONTRACT ALIGNMENT ACTIONS
• Armscor requested Denel to propose a way forward for the continued execution of the programme in a joint EXCO meeting between Denel and Armscor in December 2019.
• A proposal was submitted in the form of a letter from Denel GCEO on 15 April 2020 as per request in joint EXCO of December 2019.
• The Armscor CEO response dated 24 April 2020 did not accept the proposal to the Denel letter. Armscor’s position is based on Denel poor performance on Phase 1 and that Denel accepted the contract with its associated terms and conditions.
• The entire premise for the Denel proposal was to engage to align the contract with current realities as the contract currently has delivery dates in the past that cannot be achieved.
WAY FORWARD
The following key decisions need to be aligned and taken across all stakeholder levels until the final position has been agreed and approved contractually:
• An agreed meeting between Denel CEO, Armscor CEO and Secretary of Defense to advise on moving the programme forward.
• Chairpersons of the respective Boards of Directors, respective CEOs, Ministries of Defence and Public Enterprises, National Treasury and cabinet support for this programme to proceed as proposed.
• Acceptance of Section Variant Development Baseline by all stakeholders to unlock Phase 2.
• Unlocking sales of Pre-Production Models (PPMs) and Line Replaceable Units (LRUs – major components) to generate much needed cashflow.
• Continued sitting of the joint Armscor / Denel EXCO and STEERCOM respectively to ensure execution alignment on the programme.
THANK YOU
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SUPPLEMENTARY SLIDES – TOPSTAR &
MUHALI
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The Gun Laying and Navigation Systems (GLNS) refers to a level 3 product sub-system that is integrated into level 4 products / launcher (GV5, GV6 & MRL) systems of the SA Artillery.
The system will provide laying, navigation, orientation and fixation functionalities and qualified as a level 5 products System.
Objectives.
• The integration of the GLNS in 155mm GV5 and 127mm MRL.
• Advance in technology.
• Simple and accurate navigation and survey.
• Built-in orientation and fixation.
• Standardisation on equipment (GLNS) between different launcher systems, (GV5, GV6 & MRL)
• Main components are the shown in the GV5 with the Inertial Navigation Unit the heart of the system.
PROJECT TOPSTAR OVERVIEW
PROJECT MUHALI OVERVIEW
• SCOPE: This requirement addresses the Accelerated Down Sized Upgrade of the GV6 MK1 of the identified obsolescent system / products of the GV6 and replacement of the obsolete items. This is not a new capability requirement, but the upgrade of an existing capability to specifically address the agreed obsolescence risk of the GV6 PS including its related support system.
• Project MUHALI is currently in the production phase which entails the upgrade of 15 x G6 Systems and Log Support System with the replacement items as sourced/developed during the development phase. Project is scheduled over 2 years. Total Value R144.583m (Amendment 1)
THE END
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