Denel & AMD Annual Reports, Overview of public hearings on Defence review

Meeting report

DEFENCE PORTFOLIO COMMITTEE
2 November 2004
DENEL AND AMD ANNUAL REPORTS, OVERVIEW OF PUBLIC HEARINGS ON DEFENCE REVIEW

Chairperson: Professor K Asmal (ANC)

Documents handed out:
Denel Annual Report 2003/04
Denel Annual Report presentation
SA Aerospace Maritime and Defence Industries Association (AMD) briefing
Overview of Public Hearings on the Defence Review by Dr R Williams
Overview of Defence Review by Dr R Williams
Department briefing

Websites:
SA Aerospace Maritime and Defence Industries Association: www.amd.org.za
Denel: www.denel.co.za

SUMMARY
Denel reported that its power plant at Swartklip would have to be removed to avert health hazards to encroaching human settlements. Denel was operating once more this year at a loss. Losses on the Rooivalk programme were R2 billion, and staff retrenchments would continue at Denel, which now totalled 5 000 personnel. According to Denel relations with Armscor were strained, with confusions over duplication of functions.

The Department reported an insufficient budget to replenish local industry. It was instituting cutting out programmes to limit spending. Both Denel and AMD criticised the Departments lack of financial support to local industries and to Research and Development programmes.

The Chairperson concluded that the Committee needed to conduct cost benefit analyses of SADRI, of government subsidies in Defence industries, and the social costs and benefits of defence-related operations.

MINUTES

SA Aerospace Maritime and Defence Industries Association briefing:
The South African Aerospace Maritime and Defence Industries Association (AMD) delegation consisted of Mr R Ngwenya (Executive Director, AMD); Mr P Smit (Reunert); Mr M Minnies (Grintek); Mr M Sikho (IMT).

Mr R Ngwenya briefed the Committee on role player perspectives in Defence, and the key challenges facing South African Defence Related Industries (SADRI). He encouraged this Department to influence the competitiveness of local industries with streamlined arms acquisitions policies. Defence industries could be made more accessible to small and medium sized companies. The SADRI BEE charter was currently under developed. Future implementation should involve all necessary stakeholders in BEE. It was possible that government could initiate more co-ordinated support for export promotion; research and development; human resource development; and joint strategic research planning.

Mr B Ramfolo (Department Chief Director: Acquisitions) responded that the Department's inclined to contracting defence deals locally. However, trading in the international market forced local industries to be more competitive. The Defence Budget was too small to substantially affect growth in domestic industries. These might benefit more if the Department limited its focus to programmes and acquisitions that were strategically essential to Defence; or if government regulated the Defence industry and devised new methods for cost effectiveness. The Department was profiling other nation's defence policies, like Brazil and India, who similarly struggled against mutually exclusive business practices of the EU and NATO. 'Cutting out programmes' were being conducted with the help of other Departments-Trade and Industry, Public Enterprises- and the National Treasury, to abate the 'open chequebook' tendency of the Department.

Department briefing
The Department delegation consisted of Mr T Motumi (Chief of Policy and Planning); Ms S Rabkin (Special Advisor); Mr B Ramfolo (Chief Director: Acquisitions); Mr D Dlala (Director: Material Resources Policy); Ms T Manzini (Director: Human Resources).

Mr T Motumi briefed the Committee on specific constitutional requirements for Defence, and its current implementation statuses. A functional outline was provided for the Military Veterans Affairs Act; Military Ombudsperson; Service Corps; Civic Education Programme; and the Military Justice System. Mr Motumi defined South Africa's status in relation to International Humanitarian Law and the Geneva Conventions Act.

The Chairperson was disappointed by the briefing's shallow analyses. It gave no explanation why the Geneva Convention Act had not been incorporated into South African law, and it was devoid of information on the Military Justice System or the International Red Cross Submission. He recommended that the Committee conduct a study group to delve into these issues.

Discussion
The Chairperson thought it relevant that the EU was hearing proposals to deregulate their Defence markets, with EU nations determining their own Defence policies. He asked Mr Ngwenye if AMD was replacing its previous submission to the Department (Public Hearings) with today's. The two were worlds apart in terms of the issues they raised.

Mr Ngwenye replied that AMD was busy modifying the previous paper, which was independent of this one, and applicable to the Department in its own right.

Mr M Sayedali-Shah (DA) appreciated the frugal intentions of the Department, but if a local tender offered a contract 5% more expensive than a rival foreign contract, was it not wiser to take the local contract? Doing so would create jobs and stimulate different types of economic growth.

M Ramfolo replied that the awarding of contracts was a complex process dependent on 'cardinal or ordinal' factors, or economy of state factors. Sometimes it was best to pay more and derive spill over benefits-cardinal programmes- or pursue lowest cost contracts if it did not sink local businesses-economies of state.

Mr D Dlali (ANC) addressed the SADRI BEE charter. What key criteria conditioned the appointment of these charters? Was it the opinion of AMD that small and medium companies were currently unable to access the Defence industry? Armscor purportedly managed acquisitions contracts; why did AMD request suspension of the Armscor Act. What impact would that have on Armscor's function?

Mr Ngwenye replied that the Charter had not been circulated yet because stakeholders were still in consultation together over its provisions. Targets for skills development had been established, focusing on previously disadvantaged persons. AMD was planning to meet with DTI and the Department to align various elements of the Charter. Small and Medium companies were disadvantaged at the moment. If larger companies were awarded big contracts they could outsource and subcontract work to these smaller companies.

Dr G Koornhof (ANC) queried how AMD had transformed itself in the last ten years to meet the challenges of deregulated foreign competition.

Mr Minnie replied that global markets were increasingly protected and regulated within the EU and United States. Local Defence companies reliant on export revenues faced uncertain futures. South Africa was establishing trade relations and swapping knowledge with Brazil and India, who were active in international markets. Overseas it was difficult to identify the most suitable link person to execute export agreements.

Mr Ngwenye explained that SADRI used 10% of its turnovers for research and development spending. In other countries, government entirely sponsored research and development. SADRI could become more competitive with better government support.

Mr M Booi (ANC) asked the Department how it prioritised peacekeeping initiatives. Was it directed by political conditions on the African continent or did it visualise a permanent self-conceptualised peacekeeping function? What kinds of security threats in Africa would our peacekeeping battalion react to?

Mr Ramfolo responded that a requirement of defence procurements was that they be used for peacekeeping operations. A military strategy was decided at home before operations were launched into African regions.

Mr Ndlovu (ANC) was concerned by Mr Ramfolo's answer. How could procurements stem from a military strategy? Military strategies were constantly in flux. Mr Booi added that military strategies did not fight poverty or unemployment.

Mr Motumi answered that there was a framework set out in the White Paper and the Defence Review for peacekeeping projects. Military strategies were only considered after the framework guidelines.

Denel briefing
The Denel delegation consisted of Mr V Moche (CEO); Mr P Potgieter (Group Executive Director); Ms C Gabriel (Chief Of Staff); Mr S Basch (Group Manager Corporate Communications).

Mr V Moche briefed the Committee on results from the recent Denel annual report. Denel had operated this year at a loss, as it had in previous years, with declining local revenues and exports increasing as a proportion of sales (nearly 60% in 2004). Capital investments were not being renewed, Research and development spending was down, and the local market was shrinking to foreign competition and downward trends in SANDF spending. Retrenchments have been a continuous pattern at Denel since its inception. The values of excess assets were being written down, contributing to low returns on investments. Losses on the Rooivalk helicopter now totalled R2 billion. The Denel plant in Swartklip that was being encroached upon by human settlement would have to be relocated to avert a health disaster.

Discussion
Mr O Monareng (ANC) asked for an explanation of the restructuring and review processes at Denel with respect to race and gender

Mr Moche recalled that Denel had been created 12 years ago out of certain Armscor divisions. Denel had sought to integrate these independent, divided units and develop a singular cohesive operation. Therefore various elements had been centralised: 26 payrolls reduced to 1; 5 information technology systems converted to 1. Transformation was steady since Denel's inception, when almost 100% of personnel were white- full details could be forwarded on request.

Mr Z Madasa (ACDM) asked why exports were on the rise but the local market was dwindling. How was the acquisitions policy of Armscor apparently interfering with Denel? Was there a counter plan to reductions in capital expenditures?

Mr Moche explained that a limited local market and accessible, diverse global market dictated the composition of Denel revenues. Local contracts had receded due to a reduced Defence Budget and retention of stock and limited spending in the SANDF.

Mr S Ntuli (ANC) talked about Swartklip victims of the Denel plant. Was there a compensation package for these victims? How inclusive was the Denel annual report of Defence related industries?

Mr Moche refuted that there were any victims, other than occupational accidents, of the Swartklip plant. If there were proven victims they would be compensated. Denel was engaging the Departments of Environmental Affairs and Public Enterprise about the location of its facilities, in terms of hazards and health risks.

Mr Sayedeli-Shah asked if strategic partnerships overseas were lost to Denel financial losses. Why were there delays exiting businesses and why did Denel report that it was not complying with the Public Finance Management Act (PFMA)?

Mr Moche replied that some Denel and State owned IP contracts had been lost. Sales of business entities was ongoing and protracted because ready buyers into loss making enterprises were not easily forthcoming. Denel awaited ministerial advice on transactions that were in contravention of the PFMA. This occurred where a materiality framework was missing. However, all PFMA laws had been complied with.

Mr Huang inquired how Denel reduced staff by some 5 000 but ensured productivity? Did it make use of oversight agents for business transactions?

Mr Moche replied that retrenchments had been ongoing for the last ten years and would continue. This was because Denel was overstaffed and over facilitated from the beginning. Denel had created a Centre for Learning and Development to generate new skilled persons in the industry and phase out older redundant skills. To date 5 000 personnel had been released. Qualified oversight agents were employed to observe contracts negotiations.

Mr P Groenewald (FF) said certain losses over which Denel had control, such as the Rooivalk helicopter programmes, were inexcusable. Why was Denel selling its plants to overseas investors? How did Denel negate the impact on exports of a weakening Dollar or strengthening Rand?

Mr Moche responded that a marketing strategy had to be devised to balance exports with local sales. Ways of stimulating local contracts should be initiated. Plants were sold in which Denel was able to co-produce with owners.

Mr Diale (ANC) asked what was now the role and future of defence related industries given the abandonment of sanctions against South Africa in the 1980s.

Dr Koornhof asked about the progress of Denel with exiting non-core businesses. Also, what use were Rooivalk attack helicopters put to today? Was it necessary for Denel to be involved in property development?

Mr Moche answered that Rooivalks had a protective function. They could be used to protect South African troops on the ground. Denel was exiting property development businesses.

The Chairperson noted that Armscor, the acquisitions unit of Defence in South Africa, now had a business division. Did this compete or overlap with Denel, which was the marketing unit of Defence?

Mr Moshe alluded to strained relations between Denel and Armscor. Armscor Business contributed unnecessary local competition. As a government subsidised entity, it distorted market conditions and prices, undermining government's duty to nurture local industries. Denel's relationship with the Department was amiable and interactive.

The Chairperson indicated the constitutional requirement for a Defence system, with the existence of a monopolistic National Defence Force. Naturally, Defence procurements and capacity building would consider cost effectiveness. Exports and foreign trade were inevitable preconditions for cost efficient Defence systems. South Africa had an efficient regulatory mechanism that was relatively quick to clear overseas bound exports. He concluded that the department required a comprehensive cost benefit analysis of SADRI, of government subsidies in Defence industries, and the social costs and benefits of Defence related operations.

Overview of the Public Hearings into the Defence Review, 26, October
Professor R Williams briefed the Committee on key points that emerged out of the public hearings held last week. Ten submissions were heard. There were important recommendations to the Committee concerning the force structure and force level of Defence; Human Resources; roles and functions of Defence; strategic considerations; Defence industry and technological considerations; land claims against SANDF properties; and questions about public misunderstandings of arms acquisitions.

Discussion
Mr Ndlovu asked how state-owned science, engineering and technological capabilities could be consolidated under a single authority. What did Denel and AMD think of that proposition?

Mr Ngwenye replied that AMD had been seeking the establishment of a central authority for inter-departmental research and development. Such a mechanism would reduce costs.

Mr Moche argued that the nature of research and development differed across Departments to a certain extent, making centralisation of tasks tricky and illogical.

Mr Ramfolo explained that the Department did sponsor industrial research and development. The total Department budget was restricted to R300 million, so spending had to be carefully prioritised and limited.

Mr H Schmidt (DA) said there had to be a cost analysis in the Defence Review. The Chairperson agreed with Mr Schmidt, but indicated that his concern was a policy matter.

Mr Monareng noticed that the presentation asserted that early warning intelligence systems were geared for regional activities in Africa. Did they not scrutinise international activities? Professor Williams confirmed that the warning systems monitored regional activities only.

The meeting was adjourned.