Conventional Arms Control Bill: address by Minister Asmal; Armscor Annual Report: briefing

Meeting report

DEFENCE PORTFOLIO COMMITTEE
25 September 2001
CONVENTIONAL ARMS CONTROL BILL: BRIEFING BY MINISTER ASMAL; ARMSCOR ANNUAL REPORT & ARMSCOR ANNUAL REPORT COCKTAIL: BRIEFING

Chairperson: Ms T Modise (ANC)

Documents handed out:
Armscor's Annual Financial Report (link to Armscor website)
Electronic Presentation on Armscor's Financial Report
National Conventional Arms Control Bill : Second draft
Conventional Arms Control Bill [B50-2000]

SUMMARY
The Committee was addressed firstly by Minister of Education, Kader Asmal, Chairperson of the National Conventional Arms Control Committee, on the National Conventional Arms Control Bill. Armscor thereafter addressed the Committee on progressive steps taken by Armscor in transforming itself and on its Annual Financial Report.

MINUTES
Briefing by Minister Kader Asmal on Conventional Arms Control Bill
The Minister, Chairperson of the National Conventional Arms Control Committee, referred to Section 23 of the Bill, which prohibits the disclosure of certain information. Section 23 provides that:

No person may disclose any information in relation to the acquisition, supply, marketing, importation, exportation, design, trade, brokering development, manufacture, production, maintenance, repair of or research in connection with conventional arms, where such disclosure would be detrimental to the national interest or the security of the Republic or to the commercial interests of the manufacturer, or otherwise, without the written authority of a competent authority.

He indicated that he would like to brief the Portfolio Committee and the Portfolio Committee on Foreign Affairs in camera as the National Conventional Arms Control Committee (NCACC) deals a lot with foreign affairs issues. This includes the sale of arms.

He mentioned that there is no country, except the United States, that gives a parliamentary committee power to deal with the sale of arms. The United States Armed Forces Committee does not only monitor the sale of arms but it also sells them. This means that it is an arms selling committee.

After 1994 the National Conventional Arms Control Committee removed much of the secrecy in the arms sale arena. It also uncovered many secrets in the arms trade industry, e.g. the sale of arms to Rwanda by the former government, which arms were used to carry out a massive scale of genocide. The NCACC also uncovered relations between the SADF and the Israeli Defence Force.

The National Conventional Arms Control Committee is a body consisting of nine Ministers. All of them deal with security matters, defence, intelligence and safety and security. The Chairperson is a Minister who does not deal with security matters. Prof. Kader Asmal is currently a Minister of Education. He mentioned that he was also a Chairperson of this Committee at the time when he was a Minister of Water Affairs.

The Professor said that Section 23(2), which serves as a limitation clause to Section 23(1), is founded upon the South African Constitution which contains a right to information, together with the Promotion of Access to Information Act.

Discussion
A Member (NNP) asked why Clause 23 of the Bill makes reference to brokering development. He believed that there was a conflict because while the Minister recently spoke about having access to information, he wanted to revert to international practice where there is secrecy. Clause 23 provides that certain information must not be disclosed. Was the National Conventional Arms Control Committee not patting itself on the back?

Prof Asmal responded that before the advent of a democratic order in 1994 it did not do anything about arms sales and the secrecy thereof. However, immediately after the South African National Defence Force invaded Lesotho recently, the Democratic Party was the first to criticise the Force's activities in that country.

Capt. Fred Marais (Director, Directorate of Conventional Arms Control: Department of Defence) added that brokering would place all the players on an even footing. It would also control and regulate the flow of money. South Africa was not the first country to introduce or to control brokering. This practice is commonplace in Europe and in the United States. He added that there must be a distinction made between brokering and the agency involved in the deal.

Prof Asmal added that premature disclosure could have a negative effect on the deal as well as certain individuals desiring to protect their commercial interests.

Mr Ngculu (ANC) commented that Clause 23(1) has a qualifier built into it: "…where such disclosure would be detrimental to the national interest or the security of the Republic or to the commercial interests of the manufacturer, or otherwise, without the written authority of a competent authority." In general, information can be given unless such disclosure is detrimental to national security. He asked who is the competent authority of the National Conventional Arms Control Committee under the definition section of the Bill.

Prof. Asmal replied that the competent authority is the Chairperson of the NCACC and the Minister of Defence. They share concurrent powers. They are also capable of delegating authority to other individuals.

The definition of dual-use goods also needs to be tidied up so that if it is linked to section 23(1) the government cannot be sued by the outsiders.

Prof Asmal clarified a question on accountability to parliament, i.e. which committee is the appropriate committee to report to. He made it clear that this has been clarified in the new Bill. He however added that the question of what would be an appropriate committee cannot be legislated upon. Parliament must decide which would be an appropriate committee.

Ms T Modise (Chairperson) said that there is a need for a special committee for the NCACC to report to or behind closed doors, although normal committees do have parliamentary powers to meet in camera.

Briefing on Annual Financial Report by Armscor
Armscor is the main arms procurement agent for the government. It also promotes international marketing of South African weapons (arms products). Armscor is also a technical advisor on defence armaments and other related matters.

Ms Sindi Mabaso (Acting Chairperson, Armscor) made the initial slide presentation on Armscor's Financial Report.

She noted that the presentation had the approval of the Minister of Defence. The reason for the presentation was that Armscor has an obligation to government and to South African society to report on how it has utilised Armscor's resources derived from taxpayer's money.

Armscor - A Changing Organisation
Armscor's Board of Directors embraced the work of the previous Chairperson, Mr Ronald Haywood, in transforming this organisation. Armscor has emerged from an era when it was known for unsavoury acts. This is gradually subsiding due to Mr Haywood's efforts. Armscor's vision is to transform itself into a truly South African organisation that is also internationally mapped out. It is gradually gaining international respect and recognition. It currently has relations with countries such as Sweden, France, United Kingdom and Germany, striving to be a world-class organisation.

The Armscor Act has also been amended. This has been motivated by the past activities of this organisation, at the time when it was known as a manufacturer and a provider of permits for marketing purposes. This however no longer falls within the scope of its activities. The manufacturing is now undertaken by Denel, which is also a state owned organisation. There are other defence companies that do manufacturing. Allocation of permits is now undertaken by the National Conventional Arms Control Committee.

Corporate Governance
Armscor has embraced some of Judge Edwin King's recommendations on corporate governance, such as the separation of the Chairperson's position from the Chief Executive Officer's position. The Chairperson's position has been made non-executive. This allows the independence of the Chairperson to emerge from time to time and to express an independent view of the day-to-day operations of the organisation.

The Board of Directors has also since been revised, and is composed as follows:
Ms Mabaso-Acting Chairperson
Mr Thomo-Chief Executive Officer
Mr Masilela-Secretary of Defence
General Nyanda
Mr Phalatse
General Viljoen
Retired General Tshikare
Ms Kubushi
Mr Gamede
Mr Ramarumutsha

Financial Year Ended 31 March 2001
Ms Mabaso expressed pride at the fact that of the budget allocated to be spent on procurement, 97% was achieved. The operational budget (R183 million) is purely for Armscor's running costs. This has to be broken even in order to avert the danger of overspending.

Challenges Facing Armscor
- Armscor is responsible for market facilitation, i.e. marketing and selling of old equipment from the defence force. This represents a challenge to Armscor because there is a need to show some balance and best use of the government's resources by managing this between itself and Denel.
- Service Level Agreement - The proposed new Armscor Act and the Public Finance Management Act calls for Service Level Agreement (SLA) TO govern Armscor's relationship with the Department of Defence. This is necessary, as Armscor is a service provider to this department. It may be in place by March 2002.
- Technology Development - Armscor has a wealth of technological information. This technology has to be developed at all times because Armscor has become one of the world-class organisations.
- Government to government offsets - this is a challenge for Armscor because there are offsets that have to be monitored to make sure that they are received as having been agreed with the international suppliers. Armscor will ensure that this is not a 'pie in the sky' situation.

Annual Financial Report
Presented by Mr Sipho Thomo, Chief Executive Officer of Armscor.

Armscor's Strategic Initiatives
Content
Armscor's background
Before the year 1992, Armscor had wide ranging powers to manufacture, sell, buy, import, export and to exercise control over the defence industry. It was recognized as a big monster. After the imposition of the arms embargo by the United Nations Armscor began focusing on establishing a local defence industry. It started to manufacture weapons for South Africa. In 1992, Armscor's manufacturing activities were assumed by Denel. The marketing was later assumed by the National Conventional Arms Control Committee (NCACC).

Armscor is still an acquisition agent for the Department of Defence. It has test and evaluation facilities for defence products and systems. Accordingly, arms that are purchased must be evaluated to ensure that they are what they were expected. Armscor also tests its own products that are manufactured by Denel before exportation.

Defence Industrial Participation
Armscor is the custodian of this participation to ensure economic growth. It also manages the disposal of excess, redundant, forfeited or surplus defence materials. In addition to defence packages, Armscor places a great deal of emphasis on contracts every year on the local defence industry for the development of armaments, manufacturing, upgrading the existing armaments, maintenance and modernization of existing equipment. This creates opportunities for small businesses.

The Minister had asked that the Act be redrafted because it contains antiquated provisions which have become irrelevant, e.g. manufacturing has been transferred to Denel. Export control is currently being handled by the National Conventional Arms Control Committee. A number of things have been done in amending this piece of legislation, for instance the formation of a working group that also includes Denel. In making the amendments reference has been had to a number of documents such as the Constitution, as well as to other government policies and practices. Certain guidelines have been completed and approved by the Armscor Board of Directors, but they have yet to be approved by the Minister

Service Level Agreements
The Public Finance Management Act a service development approach and a Service Level Agreement governing the relationship between Armscor and the Department of Defence. This will ensure that the Department of Defence receives the defence products it had bargained for. This represents a departure from the past where Armscor acquired artillery and delivered it to the Department at will. The delivery now has to be against the terms of the contract. This will measure Armscor's performance from the DOD's side. This will also be linked to the transfer payment that Armscor receives and will regulate Armscor's relationship with the DOD. This agreement has already been drafted and will be signed by the Chief Executive Officer and Mr Masilela in the next few weeks.

Government Export Support
South Africa is among some of the countries that do not have a formal structure of supporting the defence industry. The sale of arms and arms control are a manifestation of the government's foreign policy. Whenever a company desires to sell arms to a foreign country there has to be government support. This would ensure the government's contentment with the sale of the equipment to the buying country.

South Africa is the only country in the African continent to be a manufacturer of armaments and war artillery. It is thus viewed with scepticism by other major developed countries. This is in regard to the efficiency of the arms it produces because other countries fear that they are not effective because they are produced in Africa, an underdeveloped continent. This situation has called for Armscor's assistance in the sale of arms. South Africa is also a smaller country. Its entire budget is smaller than the amount expended on defence in the United States of America. Thus there is a strong case for the industry to be supported.

The defence industry was developed phenomenally during the apartheid era. This means that South Africa currently has state of the art technology in defence materials, which include bomb defusing equipment and radios for communication. This has placed it alongside developed European countries. A Defence Export Support Board was formed about seven weeks ago and will help in the marketing of defence materials.

Defence Industrial Participation
Mr Thomo mentioned media reports that criticised the Defence Industrial Participation for never having worked. He stated that he finds this claim difficult because he has evidence that countertrade is working in South Africa. Countertrade is another term for defence industrial participation. Countertrade is a reciprocal phenomenon that consists of various elements, which are the defence industrial participation and national industrial participation.

Defence industrial participation applies solely for the benefit of defence industries or defence companies. On the other hand, with respect to national industrial participation, the beneficiaries are normally companies that are outside the defence industry. South Africa has split defence industrial participation further into direct defence industrial participation and indirect defence industrial participation. The former emanates from those activities where the defence industry participates in the aspects of the equipment that has been purchased. The latter relates to a situation where a country exports components of the equipment being purchased, i.e. its own equipment.

Partnerships and Joint Ventures
Many partnerships and joint ventures have been formed. One example is a joint venture that has been structured between Denel and BAE. There has also been collaboration between these companies in some of the defence projects.

Technical Assistance, Publications, Manual Acquisition and License Agreements
Every product that Armscor purchases in excess of $10 000 US dollars requires 100% industrial participation. This participation can be split into two halves. One half goes towards the defence industrial participation and the other half is contributed towards national industrial participation.

Technology Exploration Centre
The Centre is a recent concept at Armscor. The Minister of Defence signed an agreement between the South African and the English Governments in terms of which South Africa would be allowed to exploit its defence capabilities.

Discussion
Adv. Schmidt (NNP) remarked that everybody would like to see industrial participation offsets realised. How is Armscor involved in monitoring or who is monitoring the offsets? Are there any other institutions that are monitoring the offsets programme with defence industrial participation project?

Mr Thomo replied that industrial participation is divided into two aspects, viz. defence industrial participation that is monitored by Armscor and the defence industrial participation that is monitored by the Department of Trade and Industry. The former totals up to R14.6 billion. He commented that he does not have figures for the latter because it is monitored by Trade and Industry and he was therefore unqualified to make a comment.

Mr Ngculu (ANC) remarked that the Report only indicated that the Armscor Act would be ready by the end of the following year (2002). Would this not hamper Armscor's work in any way? Did the Defence Export Support Board lobbies for the export of defence materials? Have there have been any changes made to the Board that appears on the Report?

With regard to the delays about the passing of the Armscor Act, Mr Thomo replied that Armscor is frantically attempting to expedite the process to pass the Act. He said that the Defence Export Support Board is an organisation that Armscor wants to use to try and assist its defence industry to lobby participants to assist in the marketing of equipment.
He also replied that the term of office for the Board of Directors reflected in the Report expired in the end of August and the new Board of Directors is the one that is reflected in these minutes.

Mr Thabe (ANC) asked what kind of assistance does Armscor render to the black owned SMMEs to ensure that they penetrate the defence industry?

Mr Thomo replied that the government has a policy that it has adopted towards assisting black owned SMME's. For instance the policy that has been approved by the Board to render assistance to these SMME's in the area of acquisition of arms. He commented that unfortunately there is not any significant number of small SMME's that are contributing in the defence industry in the country. Most of them, in any event, are too small to deal with the vast sums of money that is involved in the acquisition of arms. As part of the bid to assist these smaller companies, Armscor has taken an initiative to encourage white owned defence companies to allow black entrepreneurs some equity stake, or alternatively, that they should employ black staff in their core areas of business.

Ms Modise added that it was not surprising that black owned SMME's are non-existent. One should not shy away from the fact that only from 1992 have people had a general understanding of what the defence industry was all about. Furthermore, blacks do not have the technical skills. There are very few black engineers in the country.

Mr Ntuli (ANC) firstly remarked that he was amused by the presentation. He desired to know what would be the implications of the move towards sustainable environmental policy for our country.

Mr Thomo replied that this question related to the environmental policy. In manufacturing armaments the defence industry adheres to all the environmental policies that companies comply with, for example not to dispose of chemical waste into rivers and pollute the soil. Testing grounds are also monitored.

Mr Bloem (ANC) asked a question regarding transformation. He criticized the Board for being almost totally male dominated. He asked if there were any steps that have been taken to address this situation.

Mr Thomo replied that the predominantly Black Board has been motivated by the need for black economic empowerment and the need to uplift black people to the defence industry. He did concede that the defence industry is male dominated within his organisation but was trying his best to address the current state of affairs.

Ms Nkuna (ANC) appeared to be concerned about defence strategies. She asked if the arms manufacturing skills are transferred to other countries, i.e. the knowledge of how to manufacture particular weapons etc.?

Mr Thomo replied that when one transfers skills, one would normally do so to allow the buyers to maintain and upgrade their equipment. Whether or not they build their defence industry would be informed by the strategies of the country and the budget.

Mr Mashimbye (ANC) asked what the future of Armscor was like, and what kind of an organisation it ideally should be. What was the state of affairs in that organisation; is it composed of highly skilled personnel and is there an exodus of staff because they feel underutilized?

Mr Thomo replied that Armscor is a very engineering oriented organisation. Most of its staff members are engineers and they have worked for this organisation for a lengthy time. Some of them have served for thirty years and there is a need to find replacement staff. However, this is a very slow process. He said that he was not aware of any exodus of staff members for the reason that they felt underutilized. The management had not brought this to his attention.
Regarding the issue of what company Armscor ideally should be, management felt that the defence budget is under extreme pressure. Thus there is a need to consider export and other activities that would generate revenue.

The meeting was adjourned.