Special Hearings — Business Hearings — 1997-11-11

ARMSCOR SPEAKER1: Thank you very much , chairperson.  First of all as you know, we were a little hesitant in being here and I think we just need to clarify that position.  We consider this a very very important event.  Our board has, as Dr Randera knows, Mr Ally, is a board that comprises people who've been on Armscor three years to three months.  It's a new board.  We believe therefore, that when you come to this type of event, you really need to have researched and done your homework well.  And there was in our arrangements when we first decided to make an input, we felt we would submit our draft and then should there be any questions as we understood it, we would get written requests so we could prepare ourselves.  Now the reason being, as I say, we don't want to sit here and say, we don't know or we don't know the answers and look in any way that we might be trying to white wash (unclear) would be a PR exercise.  And that is why we had this discussion and I must tell you this, that Dr Randera, you're one of the most amacious men that I've known.  He hung onto us  Mr Chairperson, and you know when you get a bunch of captains of industry you get organised business large and small and you still get the trade unions together to be able to handle that, I think is a mammoth task.  So we've felt that we should not really try and make his task too onerous, despite his withstanding.   The other thing, I must tell you chairperson, your fax last night tome, I must say in which you very nicely spelt out why we should be here, the nice part was you ended off, after a little bit of quiet rapping over the knuckles, saying God bless you, and may I say to you, I did appreciate that as such.  So if we by any way, if we've come here without questions and if there's any reason we've got to say we don't know, we'll give you the answers later, we're not making exuses.  So let's be very clear.
 We as Armscor have been very, we think, privileged to have built up a very warm relationship with the TRC, since this year and we've been very committed to co-operating with it, we've met members of your TRC research team and in fact set up a modus operandi here, with Mr, Elias as to how,they could not only go into our archives, or even our bought papers.  So I might tell you chairperson we believe we don't have secrets from the TRC and we were appreciative of Dr Boraine's letter in fact which we got on the 12th May this year in which you Dr Boraine actually appreciated your willingness for the boards' implementation of what we did.  
 You Bishop Tutu, as I said to you yesterday, having heard from you, we believe, well we certainly should be here and give you an update and particular to let people know as we go along, really that there is a new ARMSCOR.  Because I think with all due respect a lot of people are still thinking back 49 years, to the ARMSCOR that there was and there's a different one right now.  
 So when we look at first, if I may look at a brief historical overview which we gave in our response, very briefly we can go through it and see that in 1964, partially in response to the restrictions being placed on South Africa, the armaments board was established as (unclear) body within the Department of Defence for the aim of handling all procurement as well as re-establishing the domestic defence industry.  Largely by supporting private sector industry.  And the Armaments Development Act, of 1968, No 57, stated that the objectives of the corporation shall been to meet as effectively and economically as may be feasible, the armaments requirements of the Republic.  And for the armaments, these attainments, to be reached; Armscor was mandated to basically promote research and development, manufacturing of defence products, the acquisition thereof and sales and marketing.  
 In 1977, Armscor resumed sole responsibility for the armaments acquisition, military research and development on arms control.  It was also responsible for around 80% of domestic production at that time, which increased rapidly after the imposition of the mandatory arms embargo in November of that year.  The 1977 embargo had profound effects on procurement policies and processes.  South Africa already severely constrained, now either had to develop domestic production capabilities, and even then it had to covertly import key technologies in some case, components and even channels; or it had to establish a covert supply channels.  During the1980's, procurement was driven largely by pressing operational requirements, especially the (unclear) and dollar.  The arms of service were the identifier requirement, and would give us the specification, which would then be produced from aboard or developed and then industrialised in South Africa.  Perhaps a positive policy was that the utilisation of the private sector was used wherever possible.  And capabilities that already existed in the private sector, namely in the vehicle and electronic industries, were not to be duplicated.  And you know one finds that Mr Chairperson, these days,  when one talks about this question of spin-offs and spin-in, of how to commercialise the defence industry, most countries of the world have had great difficulty in doing this and in particular I think of a country like Russia and it's for this very reason that we've managed here in that our companies were already half-in or if you like, or more in the commercial side.  So we've been always been basically a mixture of commerce and defence and we therefore had a dual sector defence industry in South Africa.  
 Armscor being primarily responsible for weapons system development and integration, whereas the private sectors defence industries supplied materials, components sub systems and in many cases complete products.  The major portion of the South African defence industry has always been in the private sector and the ratio of employment opportunities in the private sector in relation to the public sector is approximately five to one.  
 The establishment of product development capabilities was a major milestone during this period.  Now what about the period under investigation.  Armscor and the private sector industry expanded rapidly as the war in Angola escalated.  Completely new sectors of the defence industry were established and the capabilities of the general industrial base was vastly improved.  Armscor expanded at that time into one of the largest industrial groups in South Africa and by 1981 had assets of some two billion rand and a yearly turnover of 1.5 billion and more than twenty five thousand employees.
 Armscor was also contracting more than nine hundred companies in the private sector which employed about a 150 000 people.  Today that number we estimate at the outside is fifty thousand, so there's been a considerable shrinkage in job opportunities.  Now much has been made about the front companies and the middlemen that Armscor may have resorted to in its bid to procure or export.  It is a fact that Armscor had to resort to such channels, these were termed covert channels, however most dealings were in fact formal, all be it secret, involving governments, foreign organisations and individuals.  Front companies were used to protect the secrecy, however each front company, I might mention was subjected to the same level of government scrutiny and auditing, as the rest of Armscor's operations.  Normally, I might mention that most of the front companies were not companies at all, they were merely post boxes that were established.  Now, there's no doubt that some individuals may well have benefited from the lack of open competition in certain areas and by increasing the prices therefore that Armscor had to pay.  But this, I might mention to you was not the norm.  
 When you look at 1990 to the present, we find that since the relaxation of tension in the sub continent there has been a rapid decline in the defence budget, as obviously would be expected.  That South Africa is now spending a modest 1.6 against the worlds sort of norms around about 2,2.2% of its gross domestic product on defence, and this has obviously had a very major impact on our defence industry.  
 The last eight years have seen the cancellation or curtailment of many contracts and the retrenchment as I gave you figures from 150 000 down to50 000 of a large number of personnel.  The decrease in the defence budget provided however the empitice for a complete restructuring of Armscor. Aware of the fact that  the defence industry was the resipository of the bulk of high technology in the Republic, Armscor made representation to government to commercialise some of its industrial facilities, we can just think of at the moment where Infoplan, Denel have sold off  aerial computers.  And it was felt that some of these high tech industries could be utilised as valuable assets of growth for the Republics industrial base, while still being available as manufacturing sources capable of supplying the needs of the defence and security forces.  In April 1992 ...(tape ends....)
..reporting to the Minister of Public Enterprises directly, and Denel is an independent, self-reliant tax and dividend paying company and trades its products and services in exactly the same way as the private sector does.  Increased exports and a conversion to civilian business in the case of Denel has seen its succeeding in maintaining important technologies and thereby retaining many job opportunities which otherwise would have been lost.  But obviously these have not been able to compensate for the large amount of chaps we retrenched in the defence industry itself.  And the new company, Denel, is still very much in the defence sector, but it might be of interest for you to know they've actually managed to report commercial sales in '92 , '93 of almost 152 million.  Now Armscor, itself has done away totally with all sorts of manufacturing facilities.  We do have certain test facilities, and development companies such as the Institute for Maritime Technology which Mr Terry Kruger Brown(?) knows very well down in Simonstown and the (unclear) test range.  And the formation of (unclear) has not affected Armscor acquisition function at all.  Armscor continues to contract Denel in exactly the same way as it has always contracted its former subsidiary companies and hundreds of other public and private sector companies, both locally and abroad, but obviously on a competitive basis.
 Now what of the current situation, Mr Chairperson?  You know Dr Randera said to us, the whole purpose of this meeting was not so much to be pointing fingers at business, not so much to be detracting from the past but we needed to learn from the past.  And that's something that I agreed wholeheartedly with.  And what we are going to talk about, is what has Armscor learned from the past, but I think what is more important, is what are you doing about what you learnt from the past.  And in looking at Armscor in this moment in time, we have been and we are a state corporation, we are a statutory body and we are non-profits statutory body.  The state is the sole shareholder of Armscor and the corporation is managed by a board of directors appointed by the Minister of Defence and is directly accountable to him.  Now Armscor commitment to (unclear) government policy has ensured that the Armscor of today has continued to survive in South Africa, and we are very proud of the fact that Mr Modisi has seen fit to describe Armscor, as well as Mr Tony Yengeni as a national asset.
 Now what about transformation?  Mr Chairperson, I was privileged, and I consider it a privilege to have been appointed in 1995 by Mr Modisi as the executive chairman of the Armscor Board, with an expressed brief to oversee the transformation of the organisation.  This is a task that I have applied myself to with great enthusiasm for three reasons.  The first, I find myself in the company of great South Africans, such as Judge Bamm, who unfortunately had to give up his appointment on the board because he went to higher places as a judge; and we've had like Advocate Matamela(?), who is very well known for his legal and his corporate, also his ability on corporate affairs and the whole question of corporate governors which was another very important aspect for ourselves.  Then we have a Mr (name unclear) on the board of BMW who specifically oversees human resources on our board, we have a special committee, as he does also on social responsibilities and then we also have Mr Dirk Ackerman senior, who has been or is the chairman of Sun Air, and the airport company, who brings (unclear) credibility with us, and we have a rose.  One sole rose, Mrs Chiddy Makgobode(?), who is one of the few chartered accountants in South Africa.   And recently, I think very few people would know this, that, and might be surprised by it, that Mr Keith (unclear), has come onto our board.  He is not only a director of a prominent group in South Africa, but he was the former head of MK Intelligence.  And he's moved also onto our board.  Now what about a man like Dr Magee(?).  In looking to process and let's talk about transformation, we said, well you know, human rights is an issue that we need to look at.  It's something that the defence industry hasn't actually perhaps faced sufficient focus on.  So what did we do?  We went and asked a man like Dr Magee, would he join our board?  I might tell you, he sat there, chairperson, he said to me,
"You know, Ron, I have a little bit of difficulty coming on to your Armscor board.  I helped fix bullet wounds, I don't help make them."
But he was persuaded to come aboard and help us in, you'll agree, something that is different and difficult for the defence sector and defence industry.  So he in turn, has made a great difference to us, when looking at the aspects of human rights as such.  And then, we've also been very fortunate in having our minister and deputy ministers, two people who've provided sound insight into what they see as the needs and requirements of the new government and the directions they wish Armscor to take.
 I've also found, the third reason why, as I said to you, I'm very excited about the opportunity, I've found amongst the top management of Armscor itself.  And I speak of the past, not just the new players that we have here along side of me.  A commitment to making Armscor relevant to the needs of the new South Africa.  I think that if we're honest, you'll find that all of our staff would say they very relieved that they no longer have the label of 'verraaiers' hanging around their necks; and they've taken various initiatives to ensure that the organisation no longer has to operate under clandestine methods of the past.  And I would now like to refer briefly to some of these changes that we've been undertaking which reflect how far we've travelled from the period being investigated by the TRC.  And we'd like to just look at a few transformation steps.  It must be noted that the principle of accountability to government was (unclear) adhered to during the entire existence of Armscor and still is.  Not only is the organisation audited internally and externally, but it is also audited by the Auditor General's office.  However since 1993, you know, we've been doing various other things, as you said a little earlier Mr Deputy Chairperson, it's sometimes hard for people themselves to change.  And we've had to look at different things and, small examples to bring about change since 1993.  You know in the past all programs were declared secret, unless otherwise stated.  So if a small component was required, was thought to be sensitive, then the entire program was deemed secret.  Now if any program manager wishes to have anything declared he or she has to motivate that, why must it be secret and then only that component is secret and not the whole program.  So this whole level of openness and transparency has started to pervade Armscor.  
 In the past too, our own accountability may have been strictly within government, today the organisation is undergoing a paradigm shift, which sees it as being accountable to the entire public.  That is why we are here today.  That is why, when the media began suggesting that we were not coming to this event, Mr Chairperson, we were, and not being transparent, it cut somewhat of a raw nerve, I have to be honest.  
 That is why we certainly are confined in ways on a continuous basis to account to the defence committees of parliament and the national council of the province, even they are so busy with other things.  Now the second example of Armscor's embracing openness and accountability, has been the issuing of what we call the acquisition bulletin.  Example of this are included in the package presented to the TRC and copies are available for the media should they need this.  This bulletin makes South Africa's acquisition process the most open in the world.  I'd like to stress that.  The most open in the world.  As subscribers can receive these hardcopies, or they can log onto an internet system which updates tenders being called for and contracts awarded on a daily basis.  Already newspapers like the Engineering News provide their readers with a full list of details.  
 Then we get to affirmative action.  You know how does one say sorry?  We hear people say, yes, I'm sorry for the past, but we believe the way you say sorry is to try and rectify some of the issues of the past in a practical way.  So what have we been doing within Armscor?  First of all, we have a look, it was virtually a totally lily-white organisation which today has changed, where we have a majority of black members on our board.  I stress a majority.  
 We also have 30% of our top management staff that is black, and 20% of our full staff compliment.  Now we've used a number of methods to do this, because we're a technical group, 60% of our people are technically inclined.  Where do you find black technical people?  Ask Eskom the difficulty they're having and how we are losing people.  So you don't use that as an excuse, so we've got to find them, we've got to build them, we've got to do something.  What do we do?  We go out there, we give school bursaries for sciences and maths.  We start from that going right through to where we educate them at varsity, then we've got a unique talent pool where we have some 30 previously disadvantaged people employed on a basis of a one year contract where we try and find them a job within Armscor or in the defence sector.  So this is an on-going one and I might mention, that although we've of late have stopped recruitment, I would allow only the recruitment of talent pool, and that is one way that you've ensured that of the 70% target we've set of all employment's to be black, we're managing 60%, which we think is reasonable if not good enough.  And we have a substantial corporate investment program. We also do not overlook the ladies.  Our objective is to have 30% of women at the top.  You know my wife often says, there's a saying behind every successful man there's a tough pushy woman.  My wife says, nonsense, behind every successful man is a very (unclear) woman.  But the fact is that we are working on women.
 And then what about affirmative procurement?  Again, how do you say sorry, how do you go and make something happen?  We've got an affirmative procurement policy in place, which gives upto 12% extra bonus on the pricing if were an all-black, all-woman company.  Shareholding and employees.  If you're, otherwise, you'll get upto 10% as mixture on the shareholding allowed and 5% on the mixture of the personnel.  Now this has made a tremendous difference in the defence industry.  I believe, we're probably one of the industries going more black quicker than most.  When I say that, I'm very proud to say we have people like Worldwide Investments who are becoming the major shareholders with Plessey, a very large group; we have the Kannenni (?) Brothers who three years ago took over as a 10% stake in Grinaker Electronics, they've taken over control, two weeks ago.  We also have people like Real Africa Investments, taking a major seat in IST.  And on the government to government industrial offers that are now on the table for defence equipment, one of the aspects that countries will be judged by, and encouraged, is to team up with previously disadvantaged black groups, on joint ventures or partnerships.   We also have a tender centre to encourage the small black businessman to come in and meet up with the major groups.  And we believe that frankly we are succeeding and we are very, very excited about it, an initiative which stems from other departments.
 Mr Chairperson, the essence of Armscor mandate has not changed todate.  It remains the procurement organisation of the South African Defence Force, it's program management skills in the field of acquisition are much sought after.  To mention just two examples, of why we feel proud about our skills.  Since the 1994 elections, we were asked by the United Nations, could we please assist in helping them, and you think about that (unclear) body, set up a procurement function for the United Nations Peacekeeping operation.  We sent a man in there for a year, he helped with the whole program.  Today South Africa is getting, it used to get 2% of the United Nations procurement, it now receives 6%.  So we're actually helping South African business.  We had a seminar this week, on telling them how they can maximise the money.  The other thing we did, we seconded a senior program manager, he's onto his third year now, to assist in the reconstruction and development program, which falls under Deputy Minister Jill Markers and he's made a tremendous input into housing at this moment in time because of his particular skills.
 Furthermore, the recent settlement of what has been know as the ISC case, is also symbolic of Armscor at work in the new South Africa.  This case affected relationship between the United States and South Africa and basically still is, because it is not totally off the table.  However, by chairing a group with tremendous support from the Deputy President himself, President Mbeki, our own Minister Midisi, the Department of Foreign Affairs and the Armscor team, we led a very very strong initiative, which took 18 months for us to finally sign off this case the beginning of the year.  We've just sent over our documentation and hopefully the compliance program will be cleared next month, and by early next year, our relationship should be normalised.  This I believe is a very very important step for our two countries.  And only today I had in my offices, the Deputy Secretary of Defence of the United Nations who was visiting Armscor.
 In conclusion, chairperson, the history of Armscor is very much the history of the development of South Africa's defence industrial capability.  It would thus be impossible to present an account, which answers all the questions, the Truth and Reconciliation Commission may have.  This submission aims to provide a framework from which the TRC can further investigate the role played by Armscor.  And if there are any questions which we today, despite our best efforts cannot answer, we pledge to answer them in writing as soon as possible.  Thank you very much.