Armscor Bill: briefing

Meeting report

DEFENCE PORTFOLIO COMMITTEE
25 March 2003
ARMSCOR BILL: BRIEFING

Chairperson: Ms TR Modise (ANC)

Documents
Power-point presentation by Armscor
Armaments Corporation of South Africa, Limited Bill [B18-2003]
Memorandum of Objects on Bill (see Appendix)

SUMMARY
The Committee was briefed about the proposed Bill by a delegation consisting of Armscor and Department of Defence representatives. Proposed changes to the existing Act include:
- redefining and refining Armscor's role in the armament industry;
- the constitution and functioning of the Armscor Board;
- guidelines on the entering of service level agreements.

The main points of debate in the ensuing discussion centered on the criteria for appointing Board members, the remuneration of Board members; delegation of borrowing powers to Armscor officials by the Board and the Armscor Reserve Fund.

Public hearing on the Bill is on 15 April 2003. Submission deadline is 10 April 2003 (email to
Committee Secretary [email protected])

MINUTES
Armaments Corporation of South Africa, Limited Bill
Mr E Phiyega (General manager: Corporate Services, Armscor) presented the briefing (see document).

Discussion
Mr Schmidt (NNP) asked if the Bill reflected operations in which Armscor was presently engaged. If not, what effect would this Bill have on Armscor operations and assets?

Mr Motumi (Deputy Director-General: Policy and Planning) replied that the Bill did indeed reflect operations currently carried out by Armscor, and thus would have no effect on assets that were under the ownership of Armscor.

Mr Schmidt asked whether they are sure that Armscor was a financially viable entity.

Mr Motumi replied that they were sure of this. He added that they would welcome any assistance from Parliament should the financial need arise but reiterated that it is an economically viable entity and that it will be even more so should this particular Bill be passed.

Mr D Rathebe (Director: Legal Support, Department of Defence) added that the fact that Arsmcor is a public entity means that it is entitled to funding from government.

Mr D Dlali (ANC) asked why Mr Rathebe was insisting that government should fund Armscor if it is a business enterprise.

Mr Motumi answered that they were not saying that the funding of Armscor would be solely from government. He explained that some of it would have to come from government because of a service level agreement and because it is a public entity. He brought up the fact that ownership of Armscor still belonged to the government.

Mr Dlali expressed concern over the issue of the Armscor Board of Directors delegating powers to employees within Armscor. He said that this created the impression of a 'blanket approach' in the delegation of such power, where anyone would have an opportunity to perform tasks that were performed by the Board.

Mr Motumi said that he did not understand the question clearly but proceeded to answer that the power the Board had in delegating, was discretionary. The Board could thus choose to delegate its powers to whosoever it felt was able. The Board could not perform all the functions of the Corporation, therefore it would be necessary to empower particular employees.

Mr Dlali went further with this question, explaining that his particular concern was with the delegation of 'borrowing powers' within Armscor.

Mr Motumi said that the Board decided on what sort of powers they delegate to officials every year, and whoever is delegated cannot go beyond these powers. Mr Rathebe added that with regards to borrowing, these powers are also subject to limitations, where an official can be instructed to borrow only up to a certain amount within their delegated power.

Mr N Sendall (Chief Director: Defence Policy, Department Of Defence) further stated that Armscor was governed as a public entity under the Public Finance Management Act (PFMA). Thus the Board would be the Accounting Authority of the entity and issues to do with 'borrowing' would be related to the PFMA.

Mr Gogotya (ANC) referred to the Armscor Reserve Fund. He asked what its purpose was and how it was controlled. He inquired as to whether it was not a 'slush fund'.

Mr Motumi answered that sometimes the Corporation would have problems arising from unforeseen circumstances. The Reserve Fund was also good for use as 'collateral funds' in instances where they would need some for borrowing. This was an accepted practice. He denied that it was a 'slush fund'. Mr Sendall added that the Reserve Fund was important as part of the Corporate Plan. This meant that it had to be disclosed.

Mr G Oosthuizen (ANC) asked what amount Armscor was talking about when referring to the Reserve Fund.

Mr Motumi explained that the Reserve Fund was also for the purpose of ensuring that the Corporation was a viable, growing concern. The Fund varies from time to time but in the past two years it has been R170 million but that presently it was down to about R100 million.

Mr Oosthuizen then asked that if Armscor were making a profit, at what point would they be able to pay revenue to the State?

Mr Motumi replied that they would not be paying revenue to the State. Their primary concern was not to make profit, as was that of companies like Eskom. If there did come a time when they would have to pay revenue, it would be a policy decision.

*Mr Phiyega explained that there was nothing untoward about the Reserve Fund and that every financial issue regarding it was disclosed.

Mr Motumi gave the example that the previous year Armscor had to dig into its Reserve Fund to revamp its information technology system. The Reserve Fund was thus useful in financially enabling the Corporation to solidify its functions.

Mr Sendall commented that under Section 13 of the PFMA, the State was entitled to revenue except from a National Public Entity. Armscor was a National Public Entity and was thus exempt from giving revenue to the State.

*Mr Mthethwa (ANC) referred to the fact that the Armscor Board consisted of non-executive members. He asked why Armscor did not want public representatives to be part of the Board.

Mr Motumi answered that the people that Armscor was supposed to account to, ought not to be the same people that make the decisions in Armscor.

Ms Modise (Chairperson: ANC) asked if a member of provincial government or a municipal council could sit on the Armscor Board.

Mr Motumi replied that such officials are the same as national government officials and would thus pose the same problem should they be appointed to the Board.

Ms Modise further probed the issue by asking if it would be correct to assume that officials who served in the public arena were not eligible to serve on the Armscor Board. She hypothetically cited the example of a Director General serving on the Board.

Mr Rathebe replied that officials such as DGs could serve on the Board, but could not be remunerated.

Mr Motumi said that there was legislation governing public officials, like the Public Service Act and other related legislation, that outline who is prohibited from serving on a board such as the Armscor Board.

Mr Rathebe reiterated that if a civil servant were to be appointed on the Board, he or she would not be remunerated.

Ms Modise was confused by this answer and asked what the delegation meant by 'public servant'.

Mr Rathebe explained that if a public servant did jobs outside their domain, they could do so with the approval of the Director General. If a Director General wants to serve on the Board, he can, but without remuneration.

In answer to Mr Gogotya asking if it was correct to assume that anybody getting paid by the State could not be paid by another organ in the state, Mr Rathebe confirmed that this was correct.

Ms Modise said that there would need to be more clarity on Board membership. She suggested that the widening of the categories that describe those who should not be members, could achieve this.

Mr Motumi stated that the Armscor Board excluded officials who were employed by the State under the Public Service Act. There were officials who were employed by the State, but not under the Public Service Act. On some boards, members are placed to look after the interests of the departments they represent.

Ms Modise probed the issue further by stating that they needed to know what criteria were being used by Armscor to appoint members to the Board. She expressed concern at the possibility of simple seconding procedures being employed to appoint members.

Mr Motumi agreed that it would be problematic if the appointment of board members was the result of simple seconding procedures. He assured the Committee that this was not the case. He expressed the opinion that members appointed should have independent stands.

Mr Mthethwa asked what remedial action Armscor took to deal with non-adherence to service level agreements.

Mr Motumi replied that Armscor takes steps to extract payments from those who do not honour their service level agreements in this instance. Mr Rathebe added that if a dispute arises from non-adherence to a service level agreement, they referred the issue to arbitration.

Mr Mthethwa expressed concern that these remedial steps seemed to be 'knee-jerk' responses and not part of a procedure.

Mr Rathebe replied that this was not so, as such action was provided for in the service agreements themselves. This was customary practice for any service agreement.

Mr Dlali asked if the delegation did not think that it was necessary for them to have clear criteria in the appointment of members of the Board.

Mr Phiyega referred to Clause 7(1) of the Bill, specifically the part which reads, "…The non-executive members of the Board must be appointed…on the grounds of their knowledge and experience,…". This demonstrated the criteria used for the appointment of Board members.

Mr Dlali referred to Clause 7(4) and asked if the delegation did not think that a mechanism was necessary for disallowing officials to be re-appointed onto the Board too many times.

Mr Rathebe replied that this was up to the Minister's discretion, though the Committee could recommend the curbing of re-appointments.

Mr Schmidt referred to the subject of "facilitating the marketing of defence material by defence-related industries" in Clause 4(2)(j) and asked what Armscor saw its role as being in this regard. Was this in any way related to South Africa's contributions to coalitions such as the New Partnership for Africa's Development (NEPAD).

Mr Phiyega denied that this clause was directly related to South Africa's contribution to NEPAD. Their facilitating role was autonomous of such government functions and was for the promotion of relevant material under Armscor.

Mr Ntuli(ANC) asked if they should not look at members in other senior positions from sectors other than the weapons industry.

Mr Motumi said this was a possibility, but reiterated that Board members are often chosen because of their expertise and knowledge which will be of benefit to the Corporation.

Mr Ntuli inquired about the remuneration of officials, asking if they were paid per meeting or otherwise.

Mr Motumi replied that Board members are remunerated on a monthly basis.

Ms Modise sternly asked what they were being remunerated for.

Mr Motumi replied that in addition to their oversight function, they would also be responsible for performing duties that would not have been delegated to officials. Their remuneration as Board members could only be seen as a type of a retainer. They received extra payments only for sub-committee meetings. Mr Sendall added that the duties of the Board members were also listed in the Public Finance Management Act.

Ms Modise asked whether this could not be seen as a double payment, since they as committee members were required to attend sub-committee meetings while not being remunerated for them. She also asked the delegation to provide an indication as to how much the Board members were remunerated per month.

Mr Motumi replied that the Armscor Board meets once a month. There were rules that governed the attendance of meetings. The monthly remuneration amount for Board members was R3600 per month.

Ms Modise asked how many members were on the Armscor Board.

Mr Motumi answered that excluding the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), who were not remunerated for their Board functions, there were nine non-executive Board members. Mr Rathebe added that whatever decision was taken on what the Board members were going to be paid was made in consultation with the Minister.

Ms Modise said that she would suggest that the work done by the sub-committee of the Board be looked on as part of the work done for the Board. She strongly suggested that this extra pay for sub-committee meetings is an extravagance. A member had the opportunity to call for meetings injudiciously solely to meet their financial requirements. The system can thus be corrupted.

Mr Middleton (IFP) asked if the remuneration amount for Board members cited by Mr Motumi included travel and accommodation expenses

Mr Motumi stated that the remuneration amount did not include travel and accommodation expenses. Board members received payments for their travel and accommodation.

Advocate EM Kubushi (Ministry of Defence: Legal Advisor) mentioned that Board members usually took flights to attend meetings. Her main concern was paying members of the Board who did not attend meetings.

Mr Motumi commented on the concerns raised about the Board members' remuneration. He made an appeal to the committee not to disadvantage Armscor because of their concerns. He stated that the Board members' remuneration was benchmarked against the remuneration of other boards.

Ms Modise expressed a desire to have the input of the general public in the selection of the Board. She suggested that they needed to have a re-look at the election of the Board. Sometimes Boards are set up with certain expectations that they often do not deliver on. Their intention was not to disadvantage Armscor, but they would not agree to unnecessarily advantage Board members. They also need to look at the re-appointment of Board members .She asked for comment from the delegation on the instance that the Chief of Defence was once a member of the Board, but is now no longer.

Mr Phiyega explained that the exclusion of the Chief of Defence from the Armscor Board was an instruction from Cabinet. It was the result of opposition that was strongly raised by the Minister of Finance on the grounds that his presence there constituted a conflict of interest. He confirmed that the Secretary of Defence did serve on the Armscor Board but was there in the capacity of Accounting Officer.

Mr Motumi commented that the criteria for the selection of Board members was one of the most hotly contested issues in the drafting of this Bill. The main point of debate was the need for Board members who had experience in the field versus having Board members who had no links with the arms industry and thus would have no conflict of interest. A policy decision by Parliament would be needed to settle this debate.

There were no further questions.

Ms Modise stated that the Bill would go for a public hearing followed by formal discussions.

The meeting was adjourned.

Appendix:

MEMORANDUM ON THE OBJECTS OF THE ARMAMENTS CORPORATION OF SOUTH AFRICA, LIMITED BILL, 2003

1. The Armaments Corporation of South Africa, Limited (''the Corporation'') was established by section 2 of the Armaments Development and Production Act, 1968 (Act No. 57 of 1968) (''the Act''). The Corporation had three major functions, namely— (a) the development and manufacturing of armament; (b) the acquisition of armament on behalf of Government; and (c) control over import and export of armament into or from the Republic.

2. However, significant changes occurred during the 1990s in respect of the Corporation. The functions of developing and manufacturing armament were transferred from the Corporation to Denel (Pty) Ltd. Control over conventional armament was transferred to the National Conventional Arms Control Committee. The creation of the Defence Secretariat in 1995 led to greater control over the acquisition of armament by the Department of Defence. As a result of these changes the White Paper on Defence, the Defence Review and the White Paper on Defence Related Industries called for the review of the role, functions and mandate of the Corporation. In response thereto the Minister of Defence issued a written instruction on 25 November 1999 that the Act must be reviewed and redrafted in order that the Corporation be correctly positioned within Government.

3. It is proposed in the Bill that the Corporation continues to exists as a juristic person with the State as sole shareholder. The object of the Corporation would now be to meet— (a) the defence matériel requirements of the Department effectively, efficiently and economically; and (b) the defence technology, research, development, analysis, test and evaluation requirements of the Department effectively, efficiently and economically.

4. FINANCIAL IMPLICATIONS FOR STATE

There are no additional financial implications for the State. The Corporation is already funded by means of a transfer payment from the budget of the Department of Defence.

5. CONSULTATION

5.1 Participation on the Drafting Committee. In addition to role players within the

Department of Defence, the following organisations were represented on the Drafting

Committee:

_ The Department of Defence

_ The Department of Public Enterprises (represented by Denel)

_ The Department of Foreign Affairs

_ The National Treasury

_ The Department of Trade and Industry

_ The South African Aerospace, Maritime and Defence Industries Association

_ The Centre for Conflict Resolution, University of Cape Town

_ Armaments Corporation of South Africa, Limited.

5.2 Wider Consultation. In resolving the cardinal policy issues posed by the Bill,

expert advice was sought from the following:

_ The Accountant-General of the Republic

_ The State Tender Board

_ The National Treasury

_ The Auditor-General of the Republic

_ The South African Institute of Government Auditors.

6. PARLIAMENTARY PROCEDURE

The State Law Advisers and the Department of Defence are of the opinion that this Bill must be dealt with in accordance with the procedure established by section 75 of the Constitution. It contains no provision to which the procedure set out in section 74 or 76 of the Constitution applies. 12