Follow-up meeting with NDIC, AMD, NCAAC, Armscor & DENEL on progress and challenges

Meeting report

The Chairperson said he had received an apology from his co-Chairperson, Mr V Xaba (ANC). As there were only four Members on the virtual platform, there were insufficient to form a quorum. He proposed a five-minute break before the meeting resumed.

Ms A Beukes (ANC) complained about the poor connectivity in the parliamentary village, which made it difficult for Members to attend meetings.

The Chairperson suggested proceeding with the meeting, as it was taking too long for the last Member to join to form a quorum.

The Committee Secretary confirmed that she had received an apology from Ms M Bartlett (ANC, Northern Cape) and an apology from the Minister.

National Defence Industry Council (NDIC)

Prof Moses Khanyile, Non-Executive Director, National Defence Industry Council (NDIC), provided feedback to the Committee on the Council’s initiatives to address the defence industry’s challenges. These included the defence industry strategy, the defence industry master plan, implementation of the Defence Sector Code, an alternative funding model, designation of small-calibre weapons and ammunitions, the task team on Denel, as well as the Defence Industry Fund.

He emphasised that the South African Defence Industry (SADI) was facing serious challenges of sustainability, a mass exodus of highly skilled personnel, and the inability to sustain strategic and sovereign capabilities of the South African National Defence Force (SANDF). Most of these challenges were directly linked to:

• A massive decline in the SANDF’s budget, and the imminent closure of the Special Defence Account (SDA).
• Denel’s financial liquidity crisis, which affected its credit rating and the ability to raise capital; and an inability to sustain its small and medium enterprise (SME) supply chain, thus affecting its ability to service existing and potential contracts

Denel relied on the SANDF for sustainability.

The closure of the SDA would be tantamount to shutting down the SADI, because most of the SANDF’s projects tended to be multi-year in nature. Therefore, the decision to close the SDA should be reconsidered

Armscor

Mr Sipho Mkwanazi, Acting Group Executive, Armscor, led the delegation team to make the presentation.

Because the Committee had not received Armscor’s presentation in advance, Members were not happy with Armscor’s conduct.

Mr W Mafanya (EFF) said that Members needed to apply their minda to deliberate before engaging with Armscor. Convention dictated that presentation materials should be sent to the Committee at least one week prior to the actual presentation.

Mr Mkwanazi responded that his assistant had informed him that the presentation materials had been sent to the Committee on Monday.

Mr S Marais (DA) suggested having the slides displayed on the screen so that Members could follow them as the content was being presented.

Mr T Mmutle (ANC) agreed with the suggestion.

Ms N Nkosi (ANC, Mpumalanga) said that since the majority were saying that the presentation must continue, she would not insist on her request. She had actually wanted to request to have this presentation removed from the agenda as she said it was imperative for Members to apply their minds on to the briefing content.

The Chairperson commented that it was unacceptable for Armscor just to make its presentation, as such, but he would allow the entity to brief the Committee, and warned that it should be the last time.

Mr Marais expressed his displeasure at Armscor’s treatment of Committee Members. Armscor knew how the Committee worked and the requirement for documents to be submitted prior to the presentation. It would only be fair if Armscor had to report to the Committee why this had not been done accordingly. If had not been for the urgency of Armscor’s matters, he would not have allowed Armscor to make its presentation.

Mr Mkwanazi said the presentation included three sections covered Project Hoefyster, Intellectual Property (IP), and the Arms Control Asset Tracking System (ACATS).

During several previous presentations to the Parliamentary Portfolio Committee and others, Denel had maintained that the development of the Section Variant had been completed (Product Baseline achieved). Armscor disagreed with this statement, as there were a significant number of technical non-compliances not resolved. During August 2020, consensus had been reached between Armscor and Denel regarding the number of non-compliances to specification. Denel was requested to review the technical non-compliances and provide Armscor with :

• Non-compliances which could be rectified by Denel;
• Non-compliances which could not be rectified – Denel to request change requests using the official process.
• Denel to provide new dates and implications for completing the development phase

To date, Denel had not responded with any further information.

Armscor had provided the Committee with the current IP management practice. It was emphasised that intellectual properties were strictly controlled and protected.

The end-user certificate issue was explained in the ACATS reporting.

Discussion

The Chairperson enquired about the types of employees that the defence industry hired. He asked if there was any vetting process during the recruitment process. He was of the view that the transparency policy had been taken too far. and that some classified information of the industry should be withheld.

He requested Armscor to provide a thorough explanation on why the Committee had still not received the presentation documents. Although Armscor’s side had clarified that the presentation documents had been submitted, the Committee had not received them.

Mr Marais commented on the defence industry’s presentation. He drew Members’ attention to Point 1 of the defence industry’s strategy and the government’s options. He asked whether there had been consultation with the government, or if the recommendations had come only from the industry without consulting the government properly. He said that it would have a lot of implications. He explained that when he was at a presentation at the Standing Committee on Public Accounts (SCOPA), it had been pointed out that there was a major issue with DENEL’s reckless training. Furthermore, the Minister of Finance had also reaffirmed that there would be no money for Denel to recapitalise in this financial year. On top of that, the Department of Defence did not have additional funds in its special defence account and budget. He therefore wanted to know whether selling Denel would be the right strategy for the country. Did the industry have the capacity to take over some of the roles currently played by Denel? If Denel were to be partly privatised, how would that affect the industry?

He asked about the alternative funding model for the industry, as well as the timelines for the model to materialise. Would the alternative funding model be a five-year or ten-year plan? He also asked about the specific funding roles of the National Treasury, the Department of Defence, the Department of Public Enterprises and Denel. How would Denel be sustained if neither Treasury nor the Defence Department could meet the requirements in the initiative?

He urged Armscor to make a recommendation to the Minister of Defence to stop the Hoefyster contract. Hoefyster was a waste of public funds -- funds which the government did not have and could have been reappropriated to other more needy items. He pointed out the exorbitant R200 million penalty that had been incurred through this project.

Mr Marais expressed his serious concern on the industry’s intellectual properties and the exploitation of IP. He noted that a lot of IPs were featured in the Denel balance sheets, which he believed was a serious cause for concern as it was directly linked to the value of the intellectual properties. Those people with knowledge and expertise to implement those intellectual properties, which he had observed, were turning them into profitable products. There were experts who had worked in the industry in South Africa but now were working in Saudi Arabia and the United Arab Emirates (UAE), with similar products emerging in the market.

He enquired about the end-user certificate (EUC), seeking clarity from the industry on the difference between a EUC and an EUU. He assumed that EUU meant “end-user undertaking,” and asked whether there were other matters of the EUC which were of concern. He wanted the industry to clarify whether there was anything in the wording of the EUU or EUC that prohibited an end user country from using that technology in a final product outside of their country. The situation in Omar, Egypt and UAE had given rise to those concerns.

Mr T Mmutle (ANC) pointed out that the challenges that had been included in the presentation were not new, so the Committee should really focus on checking the progress on how well those issues had been resolved. Issues such as the end-user challenge had been dealt with in the past. He wanted the defence industry to provide the Committee with an update on whether or not that issue had been resolved.

He enquired about Armscor’s two phases. In the last engagement over Hoefyster, the Committee did raise the issue of the feasibility of the project. His impression after this presentation was that Armscor still had not taken the Committee’s input to resolve the issue seriously. The challenge of Denel seemed to be perpetual, and it affected the Hoefyster project. It would also have fiscal implications. He therefore questioned whether it was a waste for the government to keep on pumping public funds into the Hoefyster project while the project showed no positive sign of improvement. The public funds could be spent on other national priorities, such as education. He questioned if Armscor still had to continue with that project, or whether there was an alternative option.

Mr Mmutle emphasised the Committee’s approach to checking on the progress on resolving the issues that had been raised in the past.

Mr D Ryder (DA, Gauteng) concurred with all the issues that had been raised by Mr Marais and Mr Mmutle. Many of the issues had been repeatedly raised by Committee Members, and there seemed to be no action taken on the defence industry’s side to try resolve these challenges.

He highlighted the IP issue, and said that it had not only been used outside South Africa, but had also been duplicated in the private sector inside the country. He had seen many similar products in the private sector, and said that the research that resulted in these products had been paid for by taxpayers. Therefore, the knowledge should be kept inside the entity. He emphasised the importance of retaining IP exclusively inside the government.

He remarked that the end-user certificate was also a prolonged issue. He wanted to know how the new regulations would affect it, whether or not it was still too soon to tell the outcome, or if there had been positive developments from these new regulations.

Mr Ryder acknowledged the cut in the defence force budget, and anticipated more in the coming years. He asked the defence industry to accept the reality of the defence force budget and enquired about the industry’s alternative plan B. The industry could not solely rely on the defence force budget.

Mr Mafanya agreed with his colleagues that the issues that were raised had been repeatedly raised in the past.

He commented on the liquidity challenge at Denel, and noted the Public Enterprise Minister’s turnaround strategy. He requested the Committee to ask Minister Gordhan what types of interventions had been implemented to turnaround the entity.

He referred to Denel’s consideration of seeking funds from private banks, and warned the entity that it should approach the National Treasury first, as private banks cared only about maximising profits, which would not be helpful to the entity.

He enquired about the participation of black small business owners in the defence industry.

He noted the exodus of highly skilled professionals in the industry, and asked what measures had been put in place to prevent them from using the same skills that they had been trained in to develop similar products in other countries.

NDIC’s response

Mr Sandile Ndlovu, Executive Director: Aerospace, Maritime and Defence Industries Association (AMD), responded to the question on the end-user certificate and its regulatory process. He was happy to report that the issue surrounding the impending crisis in the Middle East had been resolved, and it had been able to avert a disaster by commencing its exports to the Middle Eastern countries such as Saudi Arabia and the UAE. He emphasised the critical position of the Middle East region for the industry. He said there was a report that was due to be tabled at the Committee.

He assured the Members that he had noted the gaps within the regulatory environment and the request for a review of all the legislation around the regulations. In February, he had been informed by the Secretariat of Defence that the review process would commence in due course. He was of the view that the regulatory environment needed to be strengthened and be made more efficient. He highlighted that the National Conventional Arms Control Act should be the enabler of the industry.

On the IP issue which involved the Middle East region, he said that the industry had started an engagement with the Deputy Minister of Defence. The objective was centred on the intention to re-engage with the Middle East and to repair the damage.

Mr Ndlovu informed the Committee that there was a master plan for the industry, which was a critical document that detailed and addressed the issues and challenges that the industry was facing. The defence industry was optimistic that the government was taking the lead to tackle these challenges. The master plan required executive oversight from the Committee, and the oversight should also be checked by the Minister of Public Enterprises.

He said the industry was well aware of the challenges facing Denel, but the other challenge was the master plan itself, as Denel was the central constituent of the plan. The industry was disappointed at the declining budget for the Department of Defence. The implication of the declining budget was that small, micro and medium enterprises (SMMEs) in the industry would be adversely impacted, which would in turn adversely affected the government’s transformation plan.

Mr Ndlovu said that he had noted the negative media publicity that surrounded the industry. He reiterated that the South African defence industry was a responsible exporter. It was not true, as the media reported, that the defence industry disregarded human rights and sold weapons to countries with terrible human rights records. The government’s role was to ensure that the exports of the industry were for the right reason.

He commented on the industry’s alternative areas of growth, and said that the growth would be constrained by the defence budget cut. It had been the industry’s stance that the areas of growth for the industry should be focused mainly on exports, because it was evident that the government could not consume what was being produced. Currently, about 60-70% of the revenue came from the export market. What the industry needed from the government was more support to make the export environment more efficient and more export friendly. To enable this goal, the industry needed support from all spheres of government. He informed Members of the grave consequences for companies in the industry due to the bad performance of Denel and Armscor.

Mr Ndlovu further drew Members’ attention to the lack of emphasis that this industry had received in the post-COVID economic recovery plan. During the discussion on economic recovery, the defence sector had been completely neglected. The sector would need to engage with the defence secretary to discuss getting further support. He clarified that the type of support which the sector needed may not be financial support, as the sector was cognisant of the COVID-19 challenge to society.

Secretariat of Defence’s response

Ms Sonto Kudjoe, Secretary for Defence, informed the Committee of the proposed budget cut for the Defence Department. It would be losing R5 billion per annum for the next three years, totalling about R15 billion. The Special Defence Account would receive only R1 billion in April next month. Furthermore, the Department had already faced budget cuts in the past three years totalling R18 billion. Cumulatively, the Department would be losing R33 billion over the span of six years.

She agreed with Members that the Hoefyester project needed to be reviewed. The first and second phases of the project still had not been completed, but the Department had already invested much in to it. The Department needed to review the courses of action for the project.

Commenting on the plan to turnaround Denel, she stressed that the sustainability of the entity could not be separated from the defence budget, since the Department of Defence was Denel’s largest client. She emphasised the importance for the country to come together to figure out a solution for Denel. She reminded everyone that Denel was not only a strategic security asset, but also a business. The Minister of Public Enterprises and Denel’s chief executive officer (CEO) must have a discussion on the entity’s sustainability. The last engagement could not proceed because the engagement had had to involve other key critical stakeholders, such as the Department of Trade and Industry, National Treasury, as well as the defence industry. She assured Members that the DoD was trying as best as it could, but Denel still needed funding.

Ms Kudjoe responded to the question about the options at the beginning of presentation. She clarified that those options came from the industry, which consisted of both government and industry. Amongst other things, what was on the agenda was to transform the industry itself, to allow new entrants such as black businesses and small businesses to participate. She reminded the Committee that normal banks were usually hesitant to give loans for the security sector. That was why the industry had set up a fund so that it could be exclusively used by those contractors. This was still an evolving process, but she was optimistic that the industry could overcome the challenges and be transformed.

Armscor’s response

Ms Dikeledi Maema, Executive Manager: Research and Development (R&D), Armscor, responded to the question on whether IPs on Denel’s balance sheet still had value, since the entity had experienced an exodus of expertise. She explained that IPs were comprised of different components, only one of which was the development of the Intellectual Properties. However, she pointed out that there were other components such as documents produced in the R&D process, which were worth a lot of value. Things such as data packs which had been properly configured and managed would mean that new experts and engineers could be trained and could manufacture certain things. Armscor had embarked on a process to ensure that data packs stayed within Armscor. They were of great value as they could shorten the learning curve for new entrants to the market.

She had referred the issue of IP having been used by experts who had left the industry and had developed similar systems in other countries, to the pending Special Investigating Unit’s (SIU’s) investigation. Armscor was providing assistance to the SIU, and would put measures in place to ensure that IP would not be lost in future.

The Chairperson reminded Armscor to respond to the question on the new entrants to the defence industry.

Mr Mkwanazi explained that the defence industry was a sensitive industry. The industry did have a vetting process and a system of earmarking the lowest to the highest security clearance for the companies in the industry.

He confirmed that there were SMMEs that were participating in the industry. He acknowledged the importance of them, and agreed that the industry could do more to ensure more SMME participants were brought into the industry.

As the Chairperson was disconnected from the virtual platform, Mr Mmutle served as Acting Chairperson, on the recommendation of Mr Marais.

Mr Mkwanazi said that the defence sector code was a catalyst for ensuring the transformation objective in the industry was realised. As it was now the second anniversary since the promulgation of the code, it was required that at least 30% black equity ownership was needed in the industry. When contracting companies, this code was also being implemented to ensure that at least 30% of the contracts were going to black-owned entities.

The Acting Chairperson asked if there were any further questions from Members.

Mr Marais said that very few of the questions he had asked had been sufficiently responded to. He understood that some of his questions were difficult to respond to, so he proposed that the NICD and ARMSCOR could submit responses in writing. He highlighted that products that had been manufactured abroad which were similar to some of the South African products, pointed to the need to strengthen IP in South Africa. Other questions such as the funding model timelines had also not been responded to.

Mr Mafanya reminded presenters to respond to his question on the industry’s interaction with the Minister of Public Enterprises on Denel’s turnaround strategy.

Ms Kudjoe said that the turnaround strategy had initially been developed by the Ministry of Public Enterprises. However, the Department of Defence had also developed its own strategy, while the National Treasury also had its own plan with Denel and Armscor. Hence, the current turnaround strategy was a consolidated document from the plans of those three departments. Some engagements on the turnaround strategy had even included colleagues from Denel and Armscor. She assured the Committee that there had been sufficient interactions with multiple key stakeholders around the issue. The Minister would be engaging at a higher level to make a determination on the turnaround strategy.

Mr William Hlakoane, Acting Group Chief Executive, Denel, confirmed that there had been ongoing engagements with the Department of Public Enterprise with Denel and Armscor regarding the turnaround plan.

Mr Mkwanazi said that the IP issue which Members had asked about was an ongoing investigation for the SIU. What Armscor was currently doing was offering necessary support, such as providing evidence for the SIU to continue its investigation. He cautioned Members that it would be premature for him to give any conclusive response to their questions at this stage.

The Acting Chairperson emphasised the Committee’s position to move Denel from the Department of Public Enterprises to the Department of Defence so that the entity would be reporting to the Defence Department in future. There were still issues ahead, and the demise of Denel would negatively affect the South African defence force. The Committee should not allow that situation to happen. He emphasised the need for more collaborative work between the Committee and these entities to prevent failures. He also expressed his hope that more transformation would happen in the defence industry.

The meeting was adjourned.