Aerospace, Marine and Defence Industries Association briefing

Meeting report

DEFENCE PORTFOLIO COMMITTEE
26 June 2007
AEROSPACE, MARINE AND DEFENCE INDUSTRIES ASSOCIATION

Chairperson: Ms T Tobias (ANC)

Documents handed out:
AMD Presentation to the Committee 19 June 2007

Audio recording of meeting

SUMMARY
The South African Aerospace Maritime and Defence Industries Association (AMD) briefed the Committee on the impact of developments in the defence industry on the South African Defence Related Industries (SADRI).  The restructuring of Denel and Armscor, the formation of a Defence Evaluation and Research Institute (DERI), developments related to the acquisition process and industrial participation as well as the Defence Industrial Development Strategy were identified as the key developments affecting SADRI.

The presentation included SADRI’s objectives, the background to the position paper and AMD’s recommendations on each of the five key development areas.  AMD was concerned by its exclusion from some of the restructuring processes taking place in the defence industry, the lack of participation in the Department of Defence (DoD) planning process, the unavailability of the Defence Update and its limited involvement in the development of Government’s Defence Industrial Development Strategy.

Members were concerned about the transfer of technology and the resulting loss of opportunity, the development of a strategy to develop the industry and the lack of involvement of the AMD in the policy-making processes of the DoD.  Questions were asked about the mandate and funding of the DERI.

It was decided to hold a workshop with all the stakeholders to address the concerns raised by both the AMD and the Committee.

MINUTES
After welcoming all present, the Chairperson informed Members that the proceedings would be brief, given prior commitments made by members of Parliament.  Given the complaints raised by Mr Hamilton over the accuracy of  minutes produced by Parliamentary Monitoring Group(PMG), present at the meeting, the Chairperson requested the organization to produce more accurate and detailed reports on the proceedings.

AMD Presentation
Mr Simphiwe Hamilton (Executive Director – AMD) summarised the scope of the presentation.  The overview of the AMD’s membership, internal structure and the 2007 programme of action (slides 3 – 7 in the attached document) were omitted from the presentation.  The focus of the presentation was an overview of the position of the South African Defence Related Industries (SADRI) on key developments within the defence landscape, in particular the restructuring of Denel and Armscor, the formation of a Defence Evaluation and Research Institute (DERI), acquisition processes and industrial participation and the development of a Defence Industrial Development Strategy.

SADRI played an important role within the defence industry and made a significant contribution to the socio-economic and socio-political landscape.  In line with Government objectives, key focus areas included the promotion of growth within the SMME business sector - 70% of members were SMME’s and the AMD was involved in several initiatives in this regard.  Skills development was a challenge and the hi-tech nature of the skills within the defence industry also benefited other sectors of the economy.  Exports accounted for 40% of turnover and made a significant contribution to the balance of trade.  The announcement by the Cabinet regarding the preferential procurement framework was the only outstanding issue for the strategy developed to promote BEE to be finalised and some of the members were already empowered.  The industry contributed technology and equipment used by the SAPS, thus contributing to the safety and security of citizens and communities.  The Minister of Defence was planning an industry-supported visit to Algeria and members were engaged with other African countries regarding defence-related projects.

The process of transformation of the industry commenced two years ago with Denel but it was decided to add the restructuring of Armscor, the formation of a Defence Evaluation and Research Institute, aligning the acquisition processes and industrial participation of the defence industry and the development of a Defence Industrial Development Strategy to the process.  The results of the SARDI feasibility study conducted by AMD were presented to the Committee in 2006.  AMD was in the process of updating the study and planned to formalize this function in order to provide the Committee with up-to-date facts and figures on the state of the defence industry.

AMD was however concerned that the Defence Update was not released for public comment since 2005.  AMD remained in the dark after receiving only one presentation on the defence policy framework after several requests.  Efforts to develop working relationships with stakeholders within the Department of Defence (DoD) were being made and the assistance of the Committee in this regard was requested.

Mr Hamilton acknowledged that AMD was not directly involved with the restructuring of Denel and there was a committee appointed for that purpose.  Within the defence industry, Denel was regarded as a critical player as the biggest employer with the highest turnover and the highest number of exports.  AMD respected Government’s prerogative in deciding the best way of restructuring Denel to the benefit of the entire industry and did not wish to be considered as obstructionist.  However, he had observed that the first two sales of shareholdings in Denel did not involve black entrepreneurs or Black Empowerment (BE) companies.  Although Denel was technically insolvent and this meant that a substantial financial risk existed, it did present the opportunity of providing the lowest possible entry level into what was potentially a lucrative industry.  He suggested that black entrepreneurs should have been allowed entry at an early stage, allowed to grow with the company and develop into credible industry players instead of first waiting for Denel to be turned around before black investors were involved.

AMD was collaborating with Denel in order to stay abreast with developments and had asked Denel to provide feedback on the progress made in the restructuring process.

Mr Hamilton said that Armscor was the agency through which the DoD and Government interacted with the defence industry.  He was concerned that the restructuring process did not include an assessment of the impact the restructuring of Armscor will have on the many contracts placed by Government and how the process will affect the relationship between the industry and Armscor.  He suggested a broader participation by all the stakeholders in the restructuring process.

AMD was not directly involved with the formation of DERI but strongly supported it.  Areas of concern included the fact that research and development (R&D) were undertaken by other companies in the defence industry and not only by Denel, the CSIR and Armscor.  Companies recognised the need to invest in R&D in order to remain competitive and there was a need for clarity on the effect Government funding will have on the income stream to DERI.  The scope, mandate and parameters of DERI needed to be clearly defined and it was understood by AMD that this will be limited to basic, pure research and did not extend to the building of prototypes.  The latter fell within the field of industry and proper handover mechanisms needed to be in place to ensure effective delivery of projects.  AMD recommended that the decision on what types of research were undertaken was not taken by the scientists within DERI but was driven by the DoD with the guidance of the Departments of Science and Technology (DST) and Trade and Industry (DTI) and was focused on areas where there were recognized gaps.

Of all the interventions, AMD had the least insight into the areas of acquisition process and industrial participation and was unsure if these were amalgamated in the Armscor restructuring process or not.  Government had taken a risk-averse approach to acquisitions in the past and decided to shelve a number of projects where there was a degree of risk involved.  However, the development and transformation of the local defence industry cannot be undertaken without some element of risk.  The attention and support of Government of the local defence industry was welcomed.  There was a need for a degree of visibility and transparency in the defence industry and it was necessary to participate in the DoD’s planning processes and in the setting of priorities and objectives.  There were instances when the DoD wanted to make acquisitions but found that there were no capacity within the local industry because companies were unaware of the need.  Taking the need for confidentiality and the security around certain state requirements into account, it was necessary to have insight into the DoD’s short, medium and long term priorities to allow the industry to plan and build capability on a commercially viable basis.  Assuming the Defence Update will not affect the White Paper on Defence Related Industries, it was recommended that the tenets and provisions of the White Paper were implemented with no further delay.  Should the Defence Update affect the White Paper, the AMD intended to ensure that the tenets of the White Paper were not eroded in the updating of the DoD’s policy framework.  Quarterly interactions with the Arms Acquisition Steering Board were planned.

At its meeting held on 12 September 2006, the Committee requested AMD to develop a Defence Industrial Development Strategy.  An extensive study was undertaken by AMD.  The Committee’s request coincided with Government issuing terms of reference to the Department of Public Enterprises to conduct a defence industry capability study with the participation of the DoD, the DTI, the DST, Denel and AMD.  AMD decided to forego its own process and support the Government’s initiative.  AMD participated as a stakeholder for a period of four months until the conclusion of the process on 20 March 2007.  It was expected that the report and recommendations would be presented in the form of a cabinet memo and it was also expected that AMD would be given the opportunity to review the report before it was presented to Cabinet.  This did not occur and it would appear that the report was indeed used to develop Government’s Defence Industry Strategy without further involvement by AMD and SADRI.  Mr Hamilton stated that AMD’s support of the strategy cannot be based merely on having participated in the process but can only be on the basis of meaningful and authoritative knowledge of the content of the memo before it was submitted to Cabinet for approval.  He was concerned that once the strategy was approved by Cabinet, it became very difficult to make changes.  To date, AMD was unable to gain access to the cabinet memo.

Mr Hamilton expanded on AMD’s recommendations for a Defence Industrial Development Strategy.  These included recognition of SADRI as an integral element of the SANDF’s defence capability, the identification of strategic capabilities in the industry, the alignment of defence-related mandates of the DoD, DTI, DST and the Department of Foreign Affairs, the establishment of a viable home market and the need to protect the local defence industry and the need to expand exports to sustain the local industry.

In conclusion, Mr Hamilton expressed AMD’s support and appreciation for Government’s intervention in the industry and the efforts made to ensure SADRI’s sustainability.  The key focus areas were the need for participation between stakeholders, the building of relationships and the consideration of the impact on SADRI.

Discussion

The Chairperson thanked Mr Hamilton for the informative presentation. She expressed the need to reschedule the postponed workshop of the previous year, between the Portfolio Committee; the Department of Defence and defence industry stakeholders.

Mr Monareng interjected, but was cautioned by the Chairperson for his opportunity to speak at a later stage.

Mr R Shah (DA) complimented Mr Hamilton on his presentation and asked if the defence industry was involved in the processing of export permits for defence-related equipment.  He wanted to know if there was a transfer of technology taking place as equipment (for example armoured personnel carriers) was being manufactured elsewhere.  He asked whether the defence industry was being set up for takeover by external parties.  He wanted to know if the local defence industry was cooperating with countries that had poor human rights records.  He mentioned an occasion two years ago when he investigated a complaint he had received from a small BEE company regarding Denel – at the time he was given the assurance that the smaller players in the industry were being involved in production but the same assurance was now reiterated.  He asked if Mr Hamilton had any experience of nepotism within the industry.

Dr G Koornhof (ANC) asked for a report on the progress made on some of the issues raised by the Committee in its last meeting in September 2006.  He wanted to know the status of the application made to the DTI for the defence industry to be formally recognised as an economic sector.  He asked if there was an improvement in the National Conventional Arms Control Committee (NCACC) processes.  He wanted to know what the timeframe was for approval of the Defence Industrial Development Strategy.  He asked if there was an improvement in the disturbing declines in the technological capability and the budget allocation for R&D within the industry.

Mr S Ntuli (ANC) asked to what extent AMD participated in the White Paper and the Defence Update processes and whether its views were taken into account.  He asked for clarity on the issue of Government funding for both DERI and for research conducted by other companies.  He wanted to know if there was not a danger of duplication of research.

Mr M Booi (ANC) supported the Chairperson’s decision to reconvene the workshop of the stakeholders.  He understood that the AMD agreed in the September 2006 meeting to submit a document to the Committee outlining the desired outcomes of a strategy for the development of the local defence industry.  He asked for further details of the relationships between the executives of the member companies and the directorates of the various Departments.

Mr O Monareng (ANC) remarked that the transformation of the defence industry was a difficult process.  The nature of the industry was not democratic and it tended to be resistant to far-reaching changes.  He said that preferential treatment of Denel can be expected to continue.  He thought it unlikely that the target of 70% of acquisition to be supplied by local industry can be achieved in the short term.

The Chairperson reiterated that given the apparent lack of proper consultation on key defence policy matters the need to reschedule a workshop with all defence industry stakeholders was apparent.  Both the Committee and stakeholders were involved in complex matters relating to the transformation of the defence industry.

 
In reply to Mr Shah’s questions, Mr Hamilton said that he was aware of attempts by the Deputy Minister of Defence to bring a defence perspective to the NCACC’s activities.  The AMD liaised with his office on a regular basis.  Although he had not yet had the opportunity to raise a complaint with the DoD, he did notice that the section responsible for the handling of complaints was very small and the staff complement was insufficient.

Mr Hamilton explained that armoured personnel carriers were manufactured by nine or ten South African companies.  The equipment was widely used by the US Army, the United Nations and various humanitarian agencies.  Many companies in the defence industry were formed by South-African trained engineers with extensive knowledge and experience that were subsequently applied in their own companies.  The transfer of technology was not dependent on documented information and he was aware of many examples where South African technology was used in the manufacture of equipment in other countries.

Mr Hamilton could not comment on matters related to Government policy but did not think that the privately-owned companies were being set up for takeovers as this would not be in the best interests of the country, the industry or the employees of the company.

With regard to co-operation with countries with bad human rights records, Mr Hamilton replied with an emphatic negative.

The Chairperson added this mentioned co-operation was subject to the processes and guidelines of the NCACC.