The Chairperson
Portfolio Committee on Defence

Dear Madam

The South African Aerospace Maritime and Defence Industries would like to use the opportunity afforded to present its comments on the Armaments Corporation of South Africa Limited Bill.

Please find AMD’s comments attached to this letter.

Yours sincerely

(Brig Gen e j wesley)
executive director

Enclosure: Comments by AMD on Armscor Bill

1. introduction

1. An official from the Chief Director Military Policy met with the Executive Director of the South African Aerospace Maritime and Defence Industries Association (AMD) on 28 March 2003 to discuss inputs into the Armscor Bill for consideration by the Portfolio Committee on Defence (PCD). The official had previously met with PCD and they indicated that they would appreciate inputs from industry on certain issues in the Draft Bill by 10 April 2003. The PCD considered it vital that industry delivers inputs into how Armscor functions as an Acquisition Agency.

2. comment required

1. Industry should indicate their agreement or otherwise comment on the following:
1. Chapter 1: Paragraph 3: Objectives of the Corporation.
2. Chapter 1: Paragraph 4: Functions of the Board.
1. Include any concerns or limitations that should apply.
2. Paragraph 4(2) (k). Need this to be reformulated.
3. Chapter 2: Paragraph 6(1)(c): Board of Directors: Presence of Secretary for Defence on Board.
4. Chapter2: Paragraph 7(3): Who should be excluded from serving on the Board? The following aspects should be considered:

1. Conflict of interest versus competence of board members to properly evaluate contracts under consideration.
2. Appointment of retired members of SANDF after "cooling off" period of 1 year.

2. Chapter 2: Paragraph 6: Industry should give their opinion on remuneration of non-executive directors:

1. What are they remunerated for, should it be retainer or per monthly meeting. Compare this with accepted industry standard.
2. Remuneration for work in committees and sub-committees.
3. Subsistence and travel allowances: Give an indication as to how industry handles this.

3. Chapter 2: Paragraph 14 Conflict of Interest. Comment on conflict of interest section.
4. Chapter 3: Paragraph 15 (2) Financial Matters: Comment on reserve fund.

3. AMD Comment

1. Chapter 1: Paragraph 3: Objectives of the Corporation. Industry agrees with the objectives. However, industry would like some assurance that Armscor’s Commercial activity will not be having conflicting interests with those of the commercial sector. The following proviso should thus be included in paragraph 3:
   Quote "In determining Armscor's commercial interests and manner in which their revenue is collected, there should be no conflict with the interests of the commercial sector, including the Defence Related Industries". Unquote
2. Chapter 1: Paragraph 4: Functions of the Board.

1. Par 4(2)(k) (Facilitation of marketing): The word "facilitate"
   is considered ambiguous in the manner it is used and could be interpreted as legal sanction for Armscor to purport itself to be representing industry and being involved in all marketing activities of industry. However, industry supports this paragraph provided the following meanings of the words are accepted:

1. Facilitate- Make easy or less difficult or more easily achieved.
   Consultation- A meeting arranged to consult
   Consult- Seek permission or approval for a proposed act.

Note 1: The White Paper on the Defence Industry: Chapter 5 Marketing and Export Facilitation lists the Facilitation and Assistance Measures that Government will consider. Department of Defence Instruction (DODI)/Policy and Plans 2/99 refers to industry support only in terms of "Defence Equipment and Personnel Support" which is to be administered by Armscor.

Note 2: Department of Trade and Industry Division Trade and Investment South Africa (TISA) runs the Export Marketing and Investment Assistance (EMIA). EMIA provides support to industry via various schemes. This assistance is usually channelled through Export Councils or other recognised industry representative organisations. AMD is the recognised representative body for the defence related industry.

2. Paragraph 4(2)(l)(Management of Strategic Facilities): The definition of "Strategic Facilities" needs to be defined in the Schedule of the Act to remove any misunderstanding as to what constitutes strategic facility in terms of the proposed act. Some facilities within industry are also considered "Strategic".
3. Chapter 1: Section 4 (3) (a) (i) (Commercial Opportunities): AMD is concerned that this clause may imply that Armscor can add a mark-up to defence materiel prior to resale to the SANDF, or may charge levies to Industry on defence exports, or may charge for Requests For Proposal (RFPs) like the SA Rail Commuter Corporation (SARCC) does. Industry would request that some checks and balances are included, or at the very least a detailed description as to what this clause allows and does not allow. Refer also additions requested at paragraph 3 of the Bill.
4. Chapter 2: Section 6: (Representation on Board)

1. AMD fully endorses the presence of the Secretary of Defence on the Board as the end-user having oversight over his interests.
2. AMD considers it prudent for the SANDF to be on the Board.
3. The appointment of ex-SANDF officers should be considered after they have been through a "cooling-off period" of 1 year after leaving the service.

5. Chapter 2: Section 7 (3): (Conflict of Interest): Add " No person who is an accredited Armscor supplier may serve on the Board". This is to avoid a potential conflict of interest.
6. Chapter 2 Section 8 (Vacation of Office by members of Board) The member of the Board should also vacate office if
   
   (d) he or she is convicted of a criminal offence.
   
   (e) he or she is declared insolvent.

This is based on the King Commission Report 2 (King 2)

7. Chapter 3: section 15 (2) Reserve fund: The issue of the reserve fund could be open for interpretation in its current format. Industry is concerned that Armscor could start playing an investor’s role in terms of the current paragraph. AMD would suggest that such a reserve fund should only be created once properly motivated to and approved by the Minister. The reserve fund should be administered in accordance with the Public Funds Management Act (PFMA).

3. Remuneration for Non-Executive Board Members: The basis of the AMD viewpoint is that of the King Commission Reports.

1. Remuneration of Board Members. Board Members are remunerated for preparation, attendance and participation of the activities of the Board. Remuneration should be based on attendance of Board meetings. This may be useful to encourage attendance, but should not be overly generous. R4000 per meeting has been the ballpark in industry experience. Monthly retainers do not encourage attendance and should are thus not recommended.
2. Remuneration for Committee Work: Remuneration should be based on effort applied. The industry standard varies however AMD considers that R400-R500 per hour to be adequate.
3. Subsistence and Transport. Subsistence and travel expenses are normally excluded from fixed remuneration, but the rules on how much is claimable, how it is claimable and pre-approval should be very clearly defined. Industry experience indicates that paying costs with defined upper limits is the most cost effective method. Some companies runs an "Allowance" based S & T system, however many companies consider this expensive and overly generous.